Tesla Offers $1.5B in Junk Bonds to Raise Cash

The company's first junk issue is a bet that "bond investors will be as hungry as stock investors to back" Tesla as it ramps up production of the M...
Matthew HellerAugust 7, 2017

Tesla is turning for the first time to junk bonds to raise cash as it ramps up production of the new Model 3 car.

The company has relied on equity offerings and convertible bonds to meet its cash needs, raising $7.9 billion since the start of 2014. On Monday, it announced a $1.5 billion offering of senior notes due 2025.

“Tesla intends to use the net proceeds from this offering to further strengthen its balance sheet during this period of rapid scaling with the launch of Model 3, and for general corporate purposes,” it said in a news release.

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Tesla has been burning through cash ahead of the Model 3 launch, spending $1 billion in the latest quarter. It plans to produce 5,000 Model 3s a week by December and increase production to 10,000 toward the end of next year.

The car has a $35,000 starting price — half the cost of Tesla’s previous models — taking the company from a niche brand into the mainstream.

“The move to issue junk bonds … represents a bet by Tesla Chief Executive Elon Musk that bond investors will be as hungry as stock investors to back the company on expectations that its Model 3 will be a hit,” Reuters said.

Tesla has a sub-investment grade rating of B- from Standard & Poor’s, but according to The Financial Times, “other recent junk bond issues suggest it may still be able to raise money at a yield of 5 per cent or below, compared to the coupon of 2.375 per cent on its most recent convertible bonds.”

Ben Kallo, an auto analyst at Baird, told the FT that Tesla would burn through $2 billion to $3 billion a year as it builds the battery and assembly plants needed to reach its ambitious production targets.

“There is a risk they could still run out of money,” CFRA equity analyst Efraim Levy said. “Then you’d go back to the equity markets and hope it’s not too late” to raise more money.

In trading Monday, Tesla shares rose 0.5% to $355.17.