On Monday, Tesla, a California-based automaker company, announced that it will raise about $1.5 billion through its first-ever offering of junk bonds as it seeks fresh sources of money to ramp up production of the new Model 3 sedan, its first mass-market electric car. It also said that it planned to give senior notes due in 2025 and would use the offering’s proceeds to further bolster its balance sheet during a rapid growth in production of the Model 3.
The decision to issue junk bonds, lower-quality investments that offer higher level yields, represents a bet by the Tesla Chief Executive, Elon Musk, that bond investors will be as hungry as stock investors to support the company on expectations that its Model 3 will be a hit.
The electric vehicle and clean energy company have raised money in four of the last five quarters, while struggling to meet analyst expectations. Tesla plans a wider launch of its lower-cost electric car in 2018, and to strengthen the overall vehicle production from 100,000 cars this year to 400,000 next year.
The first 30 Model 3s were delivered to employees at the end of July. At the time, CEO Elon Musk worried some investors when he warned that Tesla was about to embark on “at least six months of manufacturing hell” as its attempts to get Model 3 production to 5,000 cars per week by December.
The company spent $1.2 billion in the second quarter preparing for the Model 3’s arrival. It had $3 billion cash on hand at the end of the June quarter, compared with $4 billion on March 31st.
Shares of Tesla are up 67% this year, pushing the company’s market value to about $60 billion, above of top U.S. automakers General Motors and Ford Motor, although Tesla has yet to make an annual profit.
Cash Burn Rate
Tesla is depending on the Model 3, its least pricey car, to become a profitable, high-volume manufacturer of electric cars.
The Model 3’s $35,000 starting price, which is half the cost of Tesla’s previous models, and a range of up to 310 miles, or 498 km, could bring hundreds of thousands of customers into the automaker’s fold, taking it from a common place of luxury brand to the mainstream.
Last week, Tesla said it had 455,000 net pre-orders for the Model 3, which has a $35,000 base price, and that the saloon was averaging 1,800 reservations per day since it launched late last month.
The company also said that it expects capital expenditures of $2 billion in the second half of this year to boost production at its Fremont, California assembly factory and a battery plant in Reno, Nevada.
Tesla’s bond will price later this week after several days of meetings with credit investors, who will to look into some factors, including the absence of a borrowing history, its lack of profit and its high cash-burn rate against its growth potential and its appeal as an environmentally friendly green issuer. Its cash burn has encouraged short-sellers like Greenlight Capital’s, David Einhom, to bet against the company.
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