Thursday, 20 September 2018

Tesla goes goodwill hunting with free money

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There may be no such thing as a free lunch in finance, but Tesla gave away the equivalent of about 200 of its new Model 3 cars in last week’s junk-bond deal in what it called an act of goodwill.

The giveaway came in the form of a mysterious, last-minute bump in the coupon of the futuristic automaker’s US$1.8bn junk bond last Friday from 5.25% to 5.3%.

The coupon was upped after investors had already agreed to buy the debt at the lower rate - a move that will cost Tesla US$7.2m in extra interest over the life of the eight-year bond.

That is almost enough to buy a US$35,000 Tesla Model 3 for each of the over 230 accounts that bought into the bond - which was issued to help finance the development of the new car.

A source close to the situation said that investors had already put in nearly US$4bn of orders for Tesla’s much-hyped debut bond at the 5.25% rate.

By that point their only worry was how big an allocation they would get, but lead bookrunner Goldman Sachs eventually delivered word that the bonds would actually price at 5.3%.

“There was certainly no need to increase the coupon,” a Tesla spokesman told IFR.

“However, we believe that those who demonstrate faith in Tesla should see that faith rewarded. So we chose to increase the interest rate by a small amount just before closing the offering as a goodwill gesture.”



An additional US$900,000 a year of interest payments is arguably small change for Tesla, which has a market cap of around US$60bn thanks to a stock that is up 67% this year.

But for a company burning cash - Tesla is expected to go through as much as US$3bn this year alone, according to some analysts - the move is unlikely to sit well with everyone.

“It was bizarre that they struck a deal, and then they came back and re-couponed it,” said one portfolio manager.

He said one reason for the unorthodox move might have been that the bond was quoted down a half-point in the grey market.

But the concession was not nearly enough to counter the selling pressure that ensued once the bonds started trading in the secondary.

By Thursday, the notes had already slipped to 97.625 cents on the dollar.

Others saw the move as a sign that the company is planning more debt sales in the near future.

“It’s possible they want to give the bond market a bone, so to speak,” said David Whiston, an equity analyst at Morningstar. “Tesla will likely be raising capital many times in the future.”

Whatever the motivation, the 5.3% coupon stands out as an odd choice in the US junk bond market, where almost every coupon in the last decade has come in increments of 1/8 of a point.

An analyst at a large asset manager who bought the bonds said he was told the coupon was rounded up as an homage to the new Model 3. The Tesla spokesman denied this.

In any event, the decision brought some extra attention to a company that keeps managing to find itself plenty of love in the media.

But not everybody in the fixed-income market was convinced.

“It is really a start-up operation,” said a second portfolio manager.

“This is the kind of bond people want to have to talk about at cocktail parties. But from a risk/return perspective, it is not something we wanted to own.”


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