Friday, 21 September 2018

Tesla makes debut in red-hot junk bond market

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Elon Musk’s Tesla announced its first public unsecured bond deal on Monday, offering a US$1.5bn eight-year non-call three bond that is expected to price later this week.

The deal spearheaded a flurry of announcements in the high yield bond market, with a total of eight issuers looking to take advantage of rampant investor demand.

The junk-rated deal will strengthen its balance sheet as it ramps up the launch of its Model 3 car, and for general corporate purposes, the company said.

Given Tesla’s strong name recognition, the stellar performance of its stock this year and the strength of demand for higher yielding assets, bond buyers are expected to pile into the transaction.

“All the big bond managers are going to be tripping over themselves to be part of this,” said one investor.

“We’ve seen insatiable demand for new issues over the past couple of weeks, and Tesla has big-name brand status.”

S&P and Moody’s rated the bond B- and B3, respectively, six notches below investment grade.

S&P said that although the deal would increase Tesla’s leverage, it would also provide the company with an adequate cushion for upcoming maturities and capex over the coming months.

But it gave Tesla a negative outlook, highlighting how much the company’s success hinges on making the Model 3 a success.

“The company’s financial commitments appear sustainable for now - albeit with significant execution risks,” the ratings agency wrote.



The deal signifies the next step in Tesla’s relationship with the capital markets.

Investors have been expecting a deal - in Tesla’s post-earnings conference call last Wednesday, Musk told investors he was considering raising debt, but not equity.

The electric car manufacturer has raised fresh equity every year since going public in June 2010 at a price of US$17 per share. The stock was trading at US$357 on Monday.

Tesla has issued four convertible bonds to date - it has US$3.3bn currently outstanding - but it has never accessed the public unsecured bond market.

The company bought some of those converts back after investors complained that the strong performance of Tesla stock was making it expensive to hedge the convertible bonds.

The new bond is expected to price after a series of investor meetings that conclude in California on August 10.

Goldman Sachs, Morgan Stanley, Barclays, Bank of America Merrill Lynch, Citigroup, Deutsche Bank and RBC are the bookrunners on the deal.

High yield investors have plenty of other supply to chew on this week, with seven other issuers in the market on one of the busiest days of the year for new corporate bond deals.

Clubcorp, Dynegy, Genesis Energy, TMS International, Post Holdings, PAREXEL International and Weekley Homes all announced deals, which are expected to price later in the week.


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