Tesla's Share-Sale Plans Boost Bonds
September 02 2020 - 8:41AM
Dow Jones News
By Sebastian Pellejero
The latest beneficiaries of Tesla's surging shares:
bondholders.
Prices for Tesla Inc.'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 have climbed more than 7% this week
alone, powering the company to a market capitalization of around
$442 billion -- bigger than Fiat Chrysler Automobiles NV, Ford
Motor Co. and General Motors Co. combined.
While stock investors' enthusiasm for the company's prospects
has helped send shares through the roof, bondholders remain more
circumspect about the company's prospects. 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 Tesla
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 is on pace to sell around
430,000 vehicles in 2020, according to estimates by research firm
CreditSights, 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 $366 billion in market value this
year, despite posting just $120 million in net income during 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 it gives the company 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 producing 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, chief investment officer at Diamond Hill
Capital Management.
Chief Executive Elon Musk, the company's largest shareholder,
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 added, 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 658 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," said Mr. Pars.
--Dave Sebastian contributed to this article.
Write to Sebastian Pellejero at sebastian.pellejero@wsj.com
(END) Dow Jones Newswires
September 02, 2020 08:26 ET (12:26 GMT)
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