Tesla Increases Bond Deal to $1.8 Billion for Model 3 Production
Tesla Inc. is increasing its debut bond deal to $1.8 billion as it seeks to finance production of the Model 3 that the electric-car maker has staked its future on.
The eight-year bonds will have a yield of 5.25 percent, in line with initial talk, according to a person with knowledge of the matter, who asked not to be identified because the sale is private. Elon Musk’s company boosted its offering from the original $1.5 billion.
Musk, 46, brought his charm offensive to the debt market at a meeting for prospective bond buyers in Manhattan earlier this week. He walked away with orders for $600 million after just a few hours, according to investors briefed on the matter. The session, which featured a gleaming blue Model 3 on display, was part of a four-day debt-marketing extravaganza, which included an invitation from Musk for investors to tour the company’s assembly plant.
The tactics worked, as noteholders are proving willing to overlook the company’s negative cash flow and its repeated trips to capital markets to bolster its balance sheet. The debt offering, Tesla’s first of non-convertible bonds, represents the latest sign of froth in the high-yield market, where investors have been turning a blind eye to bond-market basics in search of yield.
People at the Manhattan meeting with Musk this week estimated that the company could wind up paying no more than 5 percent on the junk-rated bonds. The Bloomberg Barclays High Yield Index closed at a five-week high of 5.71 percent on Thursday, amid escalating tension in the Korean Peninsula.
Tesla’s unsecured notes will put bondholders in the same pool as their convertible counterparts, though they won’t reap the same upside reward should the Model 3, or any other success, propel the stock even further. Should the company run into execution problems and have to issue secured debt, unsecured holders would be pushed lower down on the capital structure with a lesser priority to get paid back.