TESLA : Tesla Adds Debt In Growth Push
By Matt Wirz and John D. Stoll
Tesla Inc. took a step toward financing its transformation from a niche builder of pricey luxury cars to a mass-market rival of Fords and Chevrolets, setting plans to raise $1.5 billion in its first-ever sale of traditional bonds.
The electric-car maker, gearing up for an ambitious expansion with the introduction of its more moderately priced Model 3 sedan, is expected to sell the bonds as early as Friday in a deal underwritten by Goldman Sachs Group Inc.
The Palo Alto, Calif., company said on Monday that the funds would help push broader sales of its lower-price Model 3 sedan, which the company plans to use to steal a march on mass market rivals such as Ford Motor Co.
Tesla has been a big winner in the stock market -- up more than 1,000% in the past five years to a recent market value of $59 billion -- and investors said they expect the firm's efforts to sell junk bonds to succeed, given the market's thirst for high-yield debt.
At the same time, the auto industry is among the most capital-intensive ventures in business. Tesla posted a loss of $336 million in its most recent quarter despite rising revenue, highlighting the firm's dependence on raising capital in the financial markets. Tesla is the most valuable U.S. auto maker, but it sells a fraction of the vehicles sold by General Motors Co., Ford or Fiat Chrysler Automobiles NV -- and has yet to report an annual profit after nearly 15 years in business.
Tesla "burns a lot of cash and it's not clear they have a sustainable business," said Bob Schwartz, a bond analyst for AllianceBernstein LP who is debating whether to buy the new debt. The deal is likely to get strong support from investment firms that already own Tesla stock, but "just because it has a huge market cap doesn't mean it's a good credit," he said.
Tesla is rated B-minus by S&P Global, seven notches below the firm's rating of Ford.
Turning to the bond market allows Tesla Chief Executive Elon Musk to raise money without diluting his ownership or further encumbering corporate assets.
Tesla tapped Goldman to arrange the issue of an eight-year, $1.5 billion bond, and the investment bank is unofficially marketing it to yield 5.25%, a person familiar with the matter said. Goldman is offering prospective investors a tour of the company's factory on Wednesday to introduce them to the firm, according to an investor.
The sale comes after Tesla repeatedly sold stock and convertible bonds, which can be exchanged for equity later, raising almost $8.5 billion in such deals since 2010, according to Dealogic. The firm also started borrowing against its hard assets in the corporate-loan market in 2015 and has since issued $4.5 billion in loans.
The business case for electric cars remains murky. Gasoline is cheap, driving people to pickups and sport-utility vehicles powered by internal combustion engines, and battery-powered cars are seen as taking too long to charge, expensive and lacking range. Tesla's cars, to date, have qualified for a $7,500 federal tax credit and Tesla has spent heavily to place so-called fast chargers all over the world.
Recently, Tesla's Mr. Musk promised to add electric pickup trucks, small SUVs, large trucks and bus-like vehicles. Analysts expect the future ambitions of Tesla, which is already committing a substantial chunk of the company's revenue to capital expenditures and R&D, to require additional capital increases.
The Model 3 is aimed at more mainstream buyers, with a base price of $35,000. Critics say that car can't be plagued with the same quality glitches that Model S or X buyers experienced, and that wait times for service or delivery need to be curtailed. Selling hundreds of thousands of Model 3s is seen as necessary because it could bring battery costs closer in line with conventional engines.
An electric car can cost upward of $10,000 more than its conventional counterpart, and analysts say it could take nearly a decade to close the gap. Tesla, building its own batteries, could have disproportionate influence in bringing those costs down due to its deep experience, access to technical experts and considerable scale.
A year ago, Mr. Musk combined Tesla with SolarCity, a home-solar company that he served as chairman of at the time. Combining the two companies was designed to make Tesla a more diverse company focused on batteries, solar energy and automobiles. Other auto makers have scaled back on alternative business lines.
Mr. Musk runs several ventures outside of the car business, including Space Exploration Technologies Corp. He is a major backer of those companies, with shares in some being used as collateral for personal loans used to buy even more stock in the companies he runs.
Bond investors are eager for new deals because there has been little supply in recent months due to a slowdown in mergers and acquisitions, which are usually funded with junk bonds. High-yield companies issued $9 billion of new bonds in July, the lowest amount since January 2016, according to Dealogic, when collapsing oil prices caused junk-debt markets to shut down.
"There hasn't been much new supply and investors have cash they need to spend," said Tom O'Reilly, head of non-investment-grade credit for Neuberger Berman Group LLC, who says he won't participate in the sale. "As a new borrower, that's going to play to your advantage."
The bond sale also comes during a summer slowdown in corporate-debt offerings, which some fund managers said could produce favorable terms for Tesla among investors hungry for new bonds. Yet several prospective buyers said they remain leery of lending to a company that has yet to report an annual profit and has one of the lowest-possible credit ratings.
Write to Matt Wirz at firstname.lastname@example.org and John D. Stoll at email@example.com