Following comments from management last week, Tesla (TSLA 4.14%) announced this morning that it intends to raise $1.5 billion in debt. CEO Elon Musk acknowledged on the earnings call that the company may look to raise capital but was not considering an equity raise. Instead, Tesla would look to tap debt markets for its capital needs, avoiding further dilution of existing shareholders.
Here's what investors need to know.
Proceeds will help fund the production ramp
The notes will be due in 2025, and unlike prior debt offerings that included convertible notes, this offering will consist of straightforward paper. The interest rate, redemption prices, and other terms have not been determined quite yet. Tesla says the proceeds will be used to strengthen the balance sheet as it ramps Model 3 production. The pricing will be an important data point, as the convertible offering in March priced in more risk than prior offerings.
Capital expenditures in the second half of 2017 are expected to be $2 billion, which would consume much of the $3 billion in cash that Tesla had at the end of June. Beyond the Model 3 production ramp, Tesla also intends to expand support infrastructure, including its Supercharger and service networks to accommodate a larger customer base.
It won't be available to the public
This offering will not be broadly available to public investors. Tesla is not registering the offering under the Securities Act of 1933, but will instead offer the notes to qualified institutional buyers. Retail bond investors will have to look elsewhere for income. Conducting the offering in this manner is also more straightforward, since the company can avoid some of the regulatory hoops associated with registered public offerings.
This will bring total debt to $9.6 billion
At the end of June, Tesla had a total of $8.1 billion in debt, including $5.6 billion in recourse debt and $2.5 billion in non-recourse debt. The non-recourse debt was absorbed from the SolarCity acquisition last year, and is largely secured by leased solar systems. The new $1.5 billion offering, which will be senior unsecured debt, will bring total debt to approximately $9.6 billion.
Moody's has rated the offering at B3
Moody's has assigned the notes a credit rating of B3, which is considered non-investment grade (also known as speculative or junk bonds). The credit rating agency also assigned Tesla a Corporate Family Rating (CFR) of B2, based on the expectation that Tesla can ramp the Model 3 and sell 300,000 units during 2018 at a gross margin of around 25%. "This level of sales and profitability would enable Tesla to strengthen its performance from sizable losses to an operating position that supports the B2 CFR," according to Moody's.
Even if Tesla finds itself under "severe financial or operating stress," the company's "brand name, production facilities, and product lineup would have considerable value to another automotive OEM or technology firm targeting the electric vehicle and mobility markets." In other words, if things go absolutely sideways, Tesla could still fetch quite a bit if it had to sell itself, in Moody's view.
Tesla is expected to remain free-cash-flow-negative until 2019, and it may also need quite a bit of cash in 2018 to cover existing convertible debt maturities. The company has $290 million in convertible notes due next year, according to its most recent 10-Q, after exchanging $145 million in convertibles for 1.16 million shares in June.