Elon Musk announces $1.5 billion bond issue for Tesla Motors Model 3 Production
Tesla Motors Chief Elon Musk announced that the company will issue bonds worth $1.5 billion to improve production facilities and capacity for its mass-market vehicle Model 3. Tesla Motors has received tremendous response for Model 3 and it will be a challenge for the company to deliver the vehicles in time. However, issuing high-risk bonds led to slight decline in Tesla stock price.
Soon after the company announced its plan to raise money by offering high-interest bonds, Standard & Poor's gave the bonds a B- rating. The S&P rating for the Tesla bonds puts them in high-risk junk bond category. Moody’s Investor Service also announced B3 rating for Tesla bonds. Junk bonds offer high rate of return but they also have high risk of default. Offering high interest rate could have an impact on Tesla’s profitability, considering the already low margin on Model 3. However, it will be more important for the company to deliver the car, instead of lagging behind on deliveries. Tesla has faced tough time in managing the demand for its earlier vehicles.
In a statement, S&P said, “We could lower our ratings on Tesla if execution issues related to the Model 3 launch later this year or the ongoing expansion of its Models S and X production lead to significant cost overruns.”
Tesla could pay up to 5.5 percent rate on its bonds. Tesla stock has jumped nearly 67 percent this year taking the valuation of the company beyond $60 billion mark. Tesla bonds can be a hit among investors looking for higher returns. Elon Musk has been successful in keeping strong confidence among investors despite the below-par performance of the company. Tesla Motors has innovative edge and Musk is successful in marketing his products well.
"Bond investors, who typically don't love companies that don't make money, will be far more forgiving when it comes to Tesla," said bond expert Robbie Goffin, managing director of FTI Consulting. Goldman Sachs, Morgan Stanley, Barclays, Bank of America Merrill Lynch, Citigroup, Deutsche Bank and RBC are the book-runners on the bond offering.
With other companies planning to improve their product line up in electronic car market, Tesla will have to move faster in order to grab a bigger share of the market. Recently, Volvo announced that the company will be manufacturing only electric or hybrid models in near future. The announcement by Volvo had a negative impact on Tesla stock price.
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