Tesla’s Junk Bonds as Hot as Tesla Stock

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Tesla Inc.’s (NASDAQ: TSLA) offering of $1.5 billion in senior unsecured debt wasn’t big enough for investors, so the company upped the sale to $1.8 billion to satisfy the demand. The company’s first offer of junk-rated bonds was, by any measure, a resounding success.

Partly that has to do with investor hunger for high-yield debt and partly it has to do with timing. Returns on high-yield debt are falling, but for issuers like Tesla, raising cash by selling bonds is still cheap.

The bonds, originally set to yield 5.25%, were sold at a coupon of 5.3%. The notes are due in 2025. S&P rates the bonds B− and Moody’s assigned a rating of B3.

The offering came just two weeks after the launch of the Model 3, and the timing is no accident. Coverage of the launch was massive and new orders for the Model 3 spiked to 1,800 a day in the following week.

Tesla plans to build a total of 20,000 Model 3 sedans by the end of the year and ramp production to 500,000 a year by the end of 2018. To reach those goals will take substantial — and rapid — investment.

The company reported $3.04 billion in cash and equivalents at the end of the second quarter and $7.12 billion in long-term debt and $2.26 billion in other long-term liabilities. Since December, Tesla has burned through more than $350 million in cash, and the spending on ramping up Model 3 production is just beginning.

The company said it plans to use the net proceeds from the offering to “further strengthen its balance sheet during this period of rapid scaling with the launch of the Model 3, and for general corporate purposes.”

Tesla will offer the new debt only to institutional buyers and will not register the notes with the U.S. Securities and Exchange Commission.

The company’s stock has added about 67% for the year to date, after peaking at a year-to-date gain of nearly 80% in mid-June. The Nasdaq Composite is up about 16% over the same period, while GM stock has added just 0.3% for the year to date and Ford stock has declined more than 11%.

Tesla’s stock ended last week at $357.87 a share, in a 52-week range of $178.19 to $386.99. The stock’s 12-month price target is $313.24.