Tesla seeks $1.5 billion in junk bonds to fund Model 3 production

DETROIT (Reuters) – Tesla Inc (TSLA.O) said on Monday it would raise about $1.5 billion through its first-ever high-yield junk bond offering, as the U.S. luxury electric car maker ramps up the production of its new the Model 3 sedan.

The debt offering marks Tesla’s debut in the junk-bond market and the company will start road-shows on Monday, IFR reported, citing lead bankers on the deal.

So far, Tesla has been raising money through a combination of equity offerings and convertible bonds, which eventually convert into shares.

Following the announcement, Standard & Poor’s reaffirmed its negative outlook for the automaker and assigned a “B-” rating for the bond issue – deep into junk credit territory. S&P also maintained its “B-” long-term corporate credit rating on Tesla.

“The affirmation reflects Tesla’s improved liquidity cushion, which in our view somewhat offsets the substantial risk related to the rapid scale-up of its Model 3 production and the significantly high debt burden on its balance sheet,” S&P said in a statement on the bonds. “Given the recent launch of the Model 3, scale of Tesla’s battery manufacturing investments, the public perception of its technology, and its access to the capital markets, the company’s financial commitments appear

sustainable for now – albeit with significant execution risks.”

Elon Musk-led Tesla is counting on the Model 3, its least pricey car, to become a profitable, mass market manufacturer of electric cars.

Pre-orders for the Model 3, which has a $35,000 base price, have surpassed half a million, averaging about 1,800 per day since its launch late last month.

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At the launch, Musk however warned that Tesla would face months of “manufacturing hell” as it increases production of the sedan.

Tesla had over $3 billion in cash on hand at the end of the June quarter, compared with $4 billion as of the previous quarter and $3.25 billion a year earlier.

Tesla’s cash burn, expected to top $2 billion this year, has prompted short-sellers like Greenlight Capital’s David Einhorn to bet against the Palo Alto, California company.

Musk said last week the company was considering debt to expand cash on hand.

Goldman Sachs, Morgan Stanley, Barclays, Bank of America Merrill Lynch, Citigroup, Deutsche Bank and RBC are the book-runners on the bond offering, IFR reported.

Shares of Tesla, which have risen 67 percent this year, were down $1.92 or more than 0.5 percent at $354.99.

Reporting by Narottam Medhora and Laharee Chatterjee in Bengaluru; Editing by Sai Sachin Ravikumar and Nick Zieminski

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