Sale aim in bonds by Tesla is $1.5B

Is­sue to help it go big with Model 3

Northwest Arkansas Democrat-Gazette - - BUSINESS & FARM - In­for­ma­tion for this ar­ti­cle was con­trib­uted by Molly Smith, Gabrielle Coppola, Srid­har Natara­jan and Nabila Ahmed of Bloomberg News and by The As­so­ci­ated Press.

PALO ALTO, Calif. — Tesla is rais­ing $1.5 bil­lion as it ramps up pro­duc­tion of the Model 3 sedan, its first mass-mar­ket elec­tric car.

The com­pany said Mon­day that it planned to of­fer se­nior notes due in 2025 and would use the of­fer­ing’s pro­ceeds to fur­ther strengthen its bal­ance sheet dur­ing a rapid in­crease in pro­duc­tion of the Model 3.

Tesla de­liv­ered the first 30 Model 3s to em­ploy­ees at the end of July. At the time, Chief Ex­ec­u­tive Of­fi­cer Elon Musk wor­ried some in­vestors when he warned that Tesla was about to em­bark on “at least six months of man­u­fac­tur­ing hell” as it at­tempts to get Model 3 pro­duc­tion to 5,000 cars per week by De­cem­ber.

The debt sale will test Musk’s abil­ity repli­cate the fer­vent fol­low­ing he’s built among stock in­vestors, who’ve bought into his vi­sion of a clean-en­ergy fu­ture and pushed the shares up 67 per­cent this year. While bond mar­kets have been run­ning at his­tor­i­cally frothy lev­els, Tesla is ask­ing po­ten­tial note hold­ers to over­look the com­pany’s neg­a­tive cash flow and its re­peated trips to cap­i­tal

mar­kets to cover losses. This would be the com­pany’s first sale of non­con­vert­ible bonds, ac­cord­ing to data com­piled by Bloomberg. Dur­ing early con­ver­sa­tions with in­vestors, Tesla has been of­fer­ing to pay around 5 per­cent on the notes, ac­cord­ing to two peo­ple with knowl­edge of the mat­ter, who asked not to be iden­ti­fied, as the dis­cus­sions are pri­vate. That lines up with the 5.4 per­cent in­vestors are de­mand­ing for junkrated com­pa­nies, ac­cord­ing to Bloomberg Bar­clays in­dex data. “As a straight bond in­vestor, it’s hard for me to think I re­ally want to do this,” said Jack Fla­herty, a money man­ager at GAM Hold­ing who pre­vi­ously bought Tesla con­vert­ible debt. The con­vert­ibles give hold­ers a chance to profit if Tesla suc­ceeds, by let­ting them swap the bonds for stock. But prospec­tive in­vestors in this deal will just get the yield — and per­haps not enough to com­pen­sate for the risk, Fla­herty said. “It’s not like we’re get­ting 10 per­cent to fund a neg­a­tive-cash-flow com­pany,” said Fla­herty, who hasn’t de­cided whether he’ll par­tic­i­pate. The $ 35,000 Model 3 is the linch­pin of Musk’s plans to turn Tesla into more of a mass-mar­ket man­u­fac­turer. With a start­ing price roughly half the cost of the base Model S, the smaller sedan has racked up al­most half a mil­lion net reser­va­tions since the com­pany be­gan tak­ing re­fund­able de­posits last year. The car­maker plans to make 500,000 ve­hi­cles in 2018 and a mil­lion in 2020. The com­pany pro­duced al­most 84,000 cars and sport util­ity ve­hi­cles last year. In­vestor en­thu­si­asm has cat­a­pulted Tesla’s mar­ket value past Gen­eral Mo­tors and Ford Mo­tor, but bring­ing out the Model 3 has been costly. Tesla burned through a record $1.16 bil­lion in cash in the sec­ond quar­ter, driven by spend­ing on pro­duc­tion ca­pac­ity for the car and bat­ter­ies. Musk said on a quar­terly-earn­ings con­fer­ence call last week that the com­pany was con­sid­er­ing rais­ing debt but not eq­uity. Tesla has been able to ne­go­ti­ate fa­vor­able pay­ment terms with sup­pli­ers to the Model 3, which should help im­prove cash flow. “The nir­vana is that we can make the car and get paid for the car be­fore we have to pay our sup­pli­ers, which then the faster you grow, the faster your cash po­si­tion grows,” Musk said Wed­nes­day. “Ob­vi­ously, that’s like the promised land right there.” The bond sale is the lat­est in a se­ries of moves Tesla made to pad its cof­fers this year. The com­pany raised about $1.4 bil­lion in March through a stock and debt of­fer­ing and in June ex­panded credit agree­ments by a com­bined $800 mil­lion. “There is a well-de­vel­oped track record of suc­cess­ful in­vest­ments and gen­er­at­ing re­turns on those in­vest­ments,” said James Al­ber­tine, a se­nior an­a­lyst at Con­sumer Edge Re­search who has a buy rat­ing on Tesla shares. “Tesla’s a com­pany that’s al­ways on to the next big in­no­va­tion or the next big ad­vance­ment, and they raise money well in ad­vance of when the pub­lic finds out about that.” Tesla ended the sec­ond quar­ter with a lit­tle more than $3 bil­lion in cash, the low­est on hand in more than a year. The car­maker said last week it ex­pects about $2 bil­lion in cap­i­tal ex­pen­di­tures in the sec­ond half of the year as it spends on Model 3 equip­ment, its bat­tery “gi­gafac­tory” and the ex­pan­sion of its su­per­charger net­work. To ac­com­mo­date its ex­pand­ing cus­tomer base, Tesla has said it plans to add 100 ser­vice cen­ters world­wide over the next year and hire more than 1,400 tech­ni­cians to work on its cars. Musk plans to add a semi truck to the lineup af­ter the Model 3. Tesla shares fell $1.74 to close Mon­day at $355.17.

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