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Tesla offering junk bonds to ramp up the production of the Model 3

Tesla needs more money to ramp up the production of the Model 3.


Tesla Inc. announced on Monday that they want to raise the amount of $1.5 billion through an offering of junk bonds (the first-ever for Tesla) because they need a fresh source of cash to ramp up the production of the Model 3 sedan.

Junk bonds are considered lower-quality investments offering higher yields, and the fact that Tesla is seeking now to get money quickly is considered a bet made by Elon Musk that would attract bond investors, which are hungry as stock investors, and could back the company into the journey of making the Model 3 a hit on the market.

In 2017, Tesla shares went up 67%, and pushed the company’s market value at $60 billion, which is above the other U.S. automakers such as Ford and General Motors.

By now, Tesla used to raise money to pay its bills through convertible bonds and equity offerings, but only the convertible bonds were eventually converted into Tesla shares.

In March, 2017, Tesla managed to raise $1.4 billion through a convertible debt offering.

Standard & Poor’s turns into a critic when it comes to Tesla, and following the announcement they reaffirmed their negative outlook for the electric carmaker by assigning a “B-” rating for the bond issue.

The same rating “B-” was assigned by Standard & Poor’s for the entire Tesla company.

Standard & Poor’s said in a statement about the Tesla bonds that they could lower the ratings for the Tesla company if execution issues related to the Model 3 launch later in 2017 or the ongoing expansion of the Models S and X production would lead to significant cost overruns.

Moody’s has assigned an even lower rating for the Tesla bond issue (a B3 rating), while the rating assigned for the entire company is “B2”.

Tesla’s debt load was increased significantly in 2016 when they bought SolarCity, and Moody’s said that the overall rating “B2” that was assigned to Tesla was justified by the fact that Tesla could end up in serious financial trouble, and if this would happen, its brand name, its products and physical assets would represent a “considerable value” for the other automakers.

You think that Tesla would require even more funds to continue the production of the Model 3 in the following months?

Tesla announced at the beginning of this month (August, 2017), that they already have 455,000 net pre-orders for the Model 3 (with the base price of $35,000), and now the sedan is averaging about 1,800 reservations per day since the launch (late last month).

At the launch, Musk already warned the employees that the company would face at least six months of “manufacturing hell” because the production of the Model 3 must be significantly increased.

Tesla announced that they expect capital expenditures of $2 billion in the second half of this year, which is required to boost production at the Fremont, California assembly plant, and also the battery plant in Reno, Nevada.

On Monday, Tesla shares closed down 0.5% at $355.17 per share.

Magda Savin
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Magda Savin

I write about the renewable energy sector, electric cars and climate change issues.
I love nature and good food, so I travel all over the world to see new places and meet new people.
Magda Savin
Magda Savin
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