Tesla can trade in ‘crown jewels’ to secure fresh funding

NEW YORK: Now that Elon Musk’s quixotic bid to take Tesla Inc private is dead, the hand-wringing over when he’ll raise fresh financing has begun anew.

Musk may insist that he doesn’t need to raise more capital this year but to many on Wall Street, that sounds improbable. And even if it were true, they argue, it’s always best to lock in financing while you can. Who knows what markets will look like — and, moreover, how they will view Tesla — a year or two from now.

But how to best tap markets? With demand for the electric carmaker’s bonds flagging, some have started pointing to the model that Ford Motor Co deployed during the depths of its financial distress more than a decade ago.

The centrepiece to this approach: Putting up assets, including the iconic blue Ford oval logo, as collateral for cheap lines of credit. The Ford insignia was valued at US$8 billion (RM32.91 billion) back then.

Interbrand estimates that, given the passion that Tesla drivers have for their cars, the T emblem may already be worth half that just 15 years into its existence.

“Pledge those assets and have that in your back pocket,” said Hitin Anand, an analyst at Credit Sights. “It’s prudent to build liquidity.”

Tesla has no shortage of collateral it could use to back borrowings, analysts say, and would probably consider other assets before it considers mortgaging its brand or forms of intellectual property. Crown jewels include its manufacturing plant in Fremont, California, and its mammoth Nevada battery factory.

But piling on a new layer of debt risks alienating the company’s existing bondholders, who would be pushed further down in the pecking order for repayment if the company defaults.

Bloomberg Intelligence analyst Joel Levington estimates that US$3 billion of new secured debt may cause S&P Global Ratings to downgrade the junk bonds to the “CCC” range, following a cut by Moody’s Investors Service earlier this year.

Tesla’s situation isn’t as dire, according to Levington. Still, it made sense for the carmaker to raise money now, he said.

An extra capital infusion would help quell investor concerns about the company’s cash balances, and give it additional runway at a time when car sales are falling.

Even if the company does hit its production goals, it still has to contend with more than US$1.2 billion of convertible bonds due in November and March.

As things stand, the company will have to repay those obligations because its stock is trading below the price at which the bonds can convert into equity. With about US$2.2 billion of cash on hand, Tesla will likely need to refinance the debt, say analysts.

For now, Tesla has plenty of options. In addition to potentially securing debt, the company could likely issue more convertible bonds, according to Anand.

While the company’s junk bonds have slumped, its convertible notes still trade near or above par.