Investor's Corner

Tesla’s $1.5 billion bond offering raises skepticism for some

As Tesla seeks to help fund its Model 3 ramp up through a $1.5 billion bond offering, some investors are skeptical of how risky the investment could be.

MarketWatch cited market sources that said the bond is to be “whispered at a coupon” of 5.25 percent.

“Anyone who looks at a lot of high-yield bonds would expect more robust protection against future debt,” Valerie Potenza, head of high-yield research at Xtract Research, told the outlet. “We think it’s a terrible bond, but people seem blinded by the Tesla story.”

Moody’s Investors service note indicated, however, that Tesla is facing “sizable near-term credit risks,” listing it is a “junk” credit profile. A “junk” profile essentially means that risks associated with the investment place it in a speculative category. The company attributed this rating to the risk of the Model 3 launch and tough competitors.

Other sources were skeptical of how the rate reflects the overall risk of the investment. As the company begins producing its first high-volume EV, some are saying that Tesla’s reality will be high expenses and negative cash flow as the company works to meet expectations.

“We expect the deal will sell and perform well in a hot market, but we see 5.25% as inadequate compensation for the risks of the business and weak asset protection,” CreditSights analysts wrote in a note.

On top of this, Tesla’s rapid cash burn in recent months has left some investors wary of future debt issues. As previously reported, Tesla is slated to burn roughly $2 billion by the end of 2017 alone.

“Debt service could become an issue depending on how much debt they sell,” Potenza said.

The skepticism comes after Tesla reportedly raised $600 million in bond sales “within hours” of a meeting with investors.

The $1.5 billion bond offering is part of Tesla CEO Elon Musk’s capital raise to produce 10,000 Model 3s per week in 2018. The production model, which follows an S-curve, requires high levels of investment early on.

The skepticism surrounding Tesla is nothing new as the company has long been debated over by investors. Like the valuation of the company’s stock price, the bond offering has entered an arena where buyers are taking sides and deciding whether the company will meet high expectations and yield profits.

Tesla’s $1.5 billion bond offering raises skepticism for some
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