Tesla Hoping to Scrounge $1.5 Billion With Automotive War Bonds
Tesla Motors launched the Model 3 last month and has been scrambling to improve production volume as over 500,000 eagerly await delivery. However, by the time Tesla hits its targeted production rate of 10,000 units per week in 2018, it is still going to have months — if not a full year — of orders sizzling on the back burner.
It’s not the worst problem to have, since each reservation holder tossed down a $1,000 deposit. But CEO Elon Musk is aware that meeting demand is going to be an uphill battle. “We’re going to go through at least six months of manufacturing hell,” Musk told the press ahead of Model 3 launch event.
With the company already having spent over $2 billion in capital this year, restocking the safe is probably a good idea. As an upstart automaker framing itself as going into battle with traditional manufacturers, Tesla is issuing $1.5 billion in junky war bonds to fund the coming onslaught.
Granted, the company used less flowery language in its press release when it announced that it “intends to offer, subject to market and other conditions, $1.5 billion in aggregate principal amount of its senior notes due 2025.” But the funds will, no doubt, go to “strengthen its balance sheet during this period of rapid scaling with the launch of Model 3, and for general corporate purposes.”
Tesla isn’t broke. It still has “slightly over” $3 billion at the ready, according to its second quarter financial report. But that same report specifies that it also expects to spend $2 billion over the next six months — and while the company has seen an overall growth in its operations this year, it still isn’t profitable. In fact, Tesla claimed a $401.4 million loss in the quarter that ended June 30th, compared to a $293.2 million hit in the same period for 2016.
That might make it sound like Musk is trying to pull a fast one on the public, but this has always been a faith-based company. So long as investors continue believing in Tesla, there’s no reason to think it won’t persist as an automaker and make good on most of its promises. Despite a modest dip after Musk’s “manufacturing hell” comment, the company’s share price rebounded for August almost immediately and is presently trading at $365.28 as it progresses toward a record high.
Before that, Goldman Sachs said it could see the company’s production levels about to plateau and slashed its 12-month price target valuation by roughly 40 percent in July — when share prices initially began slipping. However, Musk has stated there should be “zero concern” about Tesla achieving a production rate of 10,000 cars a week before the end of next year.
If anything, the junk bonds will likely serve as a buffer as Tesla enters into unknown territory. Any number of disasters could befall it, and most of them have little to do with Wall Street. As calm and collected as Elon appears, ramping up production at this rate is a massive undertaking. Whether you’re of the EV faithful or a disbeliever, you have to appreciate what it’s trying to accomplish.
Last year, the automaker averaged 1,465 cars a week in total. Under ideal circumstances, Tesla wants to see 5,000 weekly deliveries of the Model 3 by December — plus however many Model S and Model X deliveries it can manage.
However, that doesn’t mean the company will suddenly become profitable. In fact, most analysts seem to agree that Tesla will be cash flow negative until 2019. Currently, the California company has total debt of around $8.2 billion, over half of which is long-term debt.
[Image: Tesla Motors]
A staunch consumer advocate tracking industry trends and regulation. Before joining TTAC, Matt spent a decade working for marketing and research firms based in NYC. Clients included several of the world’s largest automakers, global tire brands, and aftermarket part suppliers. Dissatisfied with the corporate world and resentful of having to wear suits everyday, he pivoted to writing about cars. Since then, that man has become an ardent supporter of the right-to-repair movement, been interviewed on the auto industry by national radio broadcasts, driven more rental cars than anyone ever should, participated in amateur rallying events, and received the requisite minimum training as sanctioned by the SCCA. Handy with a wrench, Matt grew up surrounded by Detroit auto workers and managed to get a pizza delivery job before he was legally eligible. He later found himself driving box trucks through Manhattan, guaranteeing future sympathy for actual truckers. He continues to conduct research pertaining to the automotive sector as an independent contractor and has since moved back to his native Michigan, closer to where the cars are born. A contrarian, Matt claims to prefer understeer — stating that front and all-wheel drive vehicles cater best to his driving style.
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Not a bad move, Telsa. Low interest rates for high quality debt and tight credit spreads in high yield mean they'll be historically low rates. Companies that don't even need the liquidity, like Apple, have taken advantage.
They sold $1.8 billion of these bonds due to extra high demand.