For the second month in a row, Chinese electric-vehicle maker NIO (NIO 3.84%) has announced a short-term funding deal right before its monthly payroll is due. The company said on March 5 that it has secured a deal to raise $235 million through the sale of short-term convertible notes to unnamed investment funds in Asia. The deal is expected to close by March 11.
NIO has said that it's negotiating a longer-term funding deal with a city government in eastern China. But this short-term raise is a sign that the larger deal isn't closing soon -- and that NIO remains a cash-strapped operation.
Here's what we know.
About the $235 million short-term funding deal
NIO said that it will issue and sell $235 million in convertible notes to "several unaffiliated Asia-based investment funds." The notes will mature in one year (on March 5, 2021) and bear zero interest -- but starting in six months, on Sept. 5, all or part of the principal amount of the notes can be converted into NIO stock at $3.50 per share.
NIO's American depositary shares closed at $3.87 on March 4.
NIO raised $100 million just last month
This is the second month in a row in which NIO has announced a short-term financing deal. NIO raised $100 million in a sale of similar convertible notes that closed on Feb. 10.
The timing of that issue suggested -- to me, at least -- that NIO was almost out of cash. Early in February, NIO CEO William Li told employees that their monthly paychecks would be a little late, coming on Feb. 14 instead of Feb. 8. He blamed the delay on the outbreak of COVID-19 in China, but it seems quite possible that NIO needed a quick cash infusion to make payroll.
Buying time to work out a longer-term deal
NIO said on Feb. 25 that it had reached a preliminary agreement to relocate its operations to the city of Hefei, in eastern China, in exchange for a substantial investment from the city's government.
Under the deal, NIO will move its China headquarters to Hefei and deepen its relationships with local suppliers and partners, in exchange for "resources and funding support" from the government.
Hefei's city government added details in a statement of its own. It said:
- NIO will move its China headquarters, including its research and development, sales, and production teams, to Hefei, in return for a substantial investment.
- It's not clear how much Hefei's government plans to invest in NIO, but it said that it expects the total amount to exceed 10 billion yuan ($1.4 billion).
- The government expects NIO's annual revenue to grow to 100 billion yuan over the next five years.
Hefei, with population of about 8 million, is the capital of Anhui Province, in eastern China. It's known as a center of scientific and industrial research.
Ten billion yuan isn't an enormous investment, but it will buy NIO a lot of breathing room. It should be enough to keep the company's lights on for another year or more even if China's new-car sales slump continues, and to at least begin construction of its own factory. (NIO's vehicles are currently built by another automaker under contract.)
It looks like NIO is living month to month right now
What do we make of all this? I think NIO is making these short-term convertible-debt deals in order to keep the lights on while it works out a longer-term financing deal.
Last October, the company was reported to be close to a similar long-term deal with another city government that fell through after that local government deemed it too risky.
It's hard for American investors to get a read on the odds that the Hefei deal will close as NIO expects or on the timing. But given today's news, we know that NIO will shortly have enough cash to keep the lights on for at least another month or two. Beyond that? We'll have to wait and see.