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Tesla to issue new debt in Model 3 funding drive

, August 7, 2017, 0 Comments

tesla-model-3-debt-marketexpress-inThe e-car pioneer has announced it wants to raise more than a billion dollars in fresh debt obligations under efforts to strengthen its balance sheet ahead of mass-producing its latest Model 3 sedan.

With Tesla’s first Model 3 mass market electric cars delivered to customers last week, the US carmaker said Monday it would be offering so-called senior notes worth $1.5 billion to ramp up production.

The notes would be unsecured debt obligations, Tesla said, maturing in 2025. The interest Tesla aims to pay, as well as redemption prices and other terms of the notes were yet to be determined.

Tesla wants to use the money for the rapid scaling of its Model 3 mass market vehicle, of which the company delivered the first 30 cars on Friday last week, all of them to Tesla employees. Chief Executive Elon Musk said investors should have “zero concern” about whether Tesla would be able to make 10,000 Model 3s per week by next year.

Tesla shares rally amid new model deliveries

In the second quarter alone, Tesla burned through $1 billion – mostly on equipping its Model 3 factory – leaving it with a little over $3 billion in cash reserves. The e-car pioneer’s first attempt at an affordable car will cost about $35,000 in its naked version – roughly half the price for its current models.

However, CEO Musk has worried some investors when he warned that Tesla was about to embark on “at least six months of manufacturing hell” as it attempts to get Model 3 production to 5,000 cars per week by December. Currently, Tesla sits on a pile of 518,000 pre-orders, for which potential customers have put down $1,000 deposits.

Musk also said he still didn’t believe his company would need to raise additional equity to fund the endeavor, and that he hoped the Model 3 would generate positive cash flow by the end of the year.

Not more than junk

Following the announcement, international ratings agency Standard & Poor’s (S&P) reaffirmed its negative outlook for the automaker and assigned a “B-” rating for the bond issue – deep into junk credit territory. S&P also maintained its “B-” long-term corporate credit rating on Tesla.

“The affirmation reflects Tesla’s improved liquidity cushion, which in our view somewhat offsets the substantial risk related to the rapid scale-up of its Model 3 production and the significantly high debt burden on its balance sheet,” S&P said in a statement on the bonds.

The agency named “the recent launch of the Model 3, scale of Tesla’s battery manufacturing investments, the public perception of its technology, and its access to the capital markets” as positive for the company. This would make Tesla’s financial commitments “appear sustainable for now – albeit with significant execution risks.”

The debt offering marks Tesla’s debut in the junk-bond market and the company will start road-shows with investors on Monday.