Credit Markets: Tesla Bonds Rally on Split -- WSJ
September 03 2020 - 3:02AM
Dow Jones News
By Sebastian Pellejero
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (September 3, 2020).
The latest beneficiaries of Tesla Inc.'s surging shares:
bondholders.
Prices for Tesla's traditional bond due in 2025 reached a record
104.36 cents on the dollar Tuesday, according to MarketAxess, after
the electric-car maker said it would sell up to $5 billion in
stock, bolstering its balance sheet after a 5-for-1 stock split
Monday.
That marks a rebound from lows around 79 cents during the worst
of the pandemic's market turmoil and the latest big swing in the
company's bond prices. Since snapping up the company's first
conventional bond offering in 2017, investors have questioned where
Tesla would get the money to repay debt as it burned cash and
struggled to turn a profit. In 2018, the bonds were near 85 cents
on the dollar following a ratings downgrade and stock price
declines.
For many, Tesla's surging market value has now answered that
question. Shares have soared since the March lows, fueled by
investors' bets that the company and its technology are poised to
change the world. Tesla shares are up more than 1% this week,
boosting the company's market capitalization above $416 billion --
bigger than Fiat Chrysler Automobiles NV, Ford Motor Co. and
General Motors Co. combined.
That rise has prompted some investor shifts. Ballie Gifford
& Co., the Scottish investment house that is Tesla's
second-largest shareholder after Chief Executive Elon Musk, said
Wednesday that it had reduced its stake in the company because of
internal guidelines around the size of a single stockholding, but
intends to remain a significant shareholder.
While stock investors' enthusiasm for Tesla's prospects has
helped send shares through the roof, bondholders remain more
circumspect about the company. In part, that is because Tesla has
often spent more cash than it generates. Its high valuation means
it can easily raise money, but skeptics say the car maker will have
to become a consistent cash generator to make its bonds trade
consistently at higher levels.
Tesla in July reported a fourth-consecutive profitable quarter
for the first time in company history, and, according to estimates
by research firm CreditSights, it is on pace to sell around 430,000
vehicles this year, far fewer than its U.S. competitors. The
company had about $8.5 billion in debt, excluding vehicle and
energy-product financing, at the end of last quarter.
Tesla has added more than $341 billion in market value this year
despite posting just $120 million in net income for the first two
quarters, supported by selling regulatory credits and improving
profitability in China. Shares fell 4.7% Tuesday after the company
disclosed its stock-selling plans.
"It's been a roller-coaster ride for bond investors," said Hitin
Anand, industrials analyst at CreditSights. "Right now, the good
news is Tesla has a lot of options at the table."
Those options make the company's debt more appealing to some,
because the company has more ways to raise money to repay
bondholders. While Tesla's growth and potential to reshape the
automobile industry have helped power stock gains, debt investors
tend to worry more about companies being able to produce stable
cash flow that can be used to make interest payments.
"We did not find the [company's bonds] attractive when they were
issued, but we do now because of Tesla's access to very low-cost
capital," said Bill Zox, portfolio manager at Diamond Hill Capital
Management.
Mr. Musk -- now the world's fourth-richest person, according to
Bloomberg -- has had a complicated relationship with fundraising,
expressing reluctance toward issuing stock over concerns that it
would dilute existing shareholders. The company raised $2 billion
through a secondary stock offering in February and sold more than
$2 billion of stock and convertible bonds -- a hybrid of debt and
equity -- in May 2019.
Tesla didn't respond to requests for comment.
A $5 billion stock sale could dilute Tesla shareholders by 2% to
3%, said Dan Ives, an analyst at Wedbush Securities Inc. But the
benefits may outweigh any dilution, he said, since that money will
get the company out of debt from a cash perspective, as well as
help support the build out of its Gigafactory plants in the U.S.
and Europe.
Tesla had around $8.6 billion of cash and equivalents as of June
30, according to company filings.
Prices for Tesla's convertible bonds have skyrocketed to more
than 614 cents on the dollar. That leaves the company with another
option to help bring down debt, if needed, since Tesla could induce
holders to convert into stock without much added compensation, said
Eli Pars, co-chief investment officer at Calamos Investments.
"It all depends on what [Tesla] thinks is its timeline for
spending money," Mr. Pars said.
--Dave Sebastian contributed to this article.
Write to Sebastian Pellejero at sebastian.pellejero@wsj.com
(END) Dow Jones Newswires
September 03, 2020 02:47 ET (06:47 GMT)
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