Tesla Faces Excessive Costs to Raise Cash

Tesla has plenty of options for raising money, but it is getting more expensive to do so, Wall Street Journal reported.

The electric car maker signaled last week it could issue new debt or equity financing in the wake of a first-quarter loss that was much worse than Wall Street analysts expected. Elon Musk, on an earnings call Wednesday, said “there’s merit to the idea of raising capital at this point” – a reversal from the chief executive’s previous insistence the firm didn’t need more money.

Some analysts say it would be prudent for Tesla to raise at least $1 billion to $2 billion to ensure that it can meet expenses. But Tesla may have already missed its best opportunity to raise money cheaply. Shares of the Palo Alto, Calif., auto maker have dropped about 36% from a recent high in December, settling Monday at $241.47.

A lower share price means Tesla executives would need to sell more of the company to raise money. If shares keep sliding, it could also make it harder to place new shares without discounting their price even further.

The potential cost to Tesla of issuing debt has also been rising. The company’s 5.3% unsecured bonds due in 2025 recently traded at 85.75 cents on the dollar, according to MarketAxess. That translates to a yield of around 8.2%, up from around 7.4% a year ago. Given the trajectory of the bonds, some investors and analysts said new unsecured bonds would need to be sold at an interest rate of around 9%.

“Investors have been burnt once,” said Bill Zox, chief investment officer of fixed income at Diamond Hill Capital Management Inc. “They would have to offer a nice concession” to bring a new bond deal.

Most observers still agree that Tesla is capable of raising a significant amount of money. Even after its stock has declined, its market capitalization remains above $40 billion, making it worth about the same as Ford Motor Co. and more than many other established businesses, the Journal added.

In the eyes of many, that means the theoretical cost to the company of issuing new shares is inexpensive. It also makes it easier to issue various types of debt and convertible bonds – a hybrid of debt and equity – since it implies the company is worth well more than its debt and could always issue additional shares if necessary.

Tesla’s market capitalization means there is “a large buyer base that is still valuing future growth for this company,” said Hitin Anand, a senior analyst at the research firm CreditSights. That in turn, he said, means that the company has a variety of ways in which it can raise money, including via unsecured bonds even if they require high interest rates.

Outside of asset-backed securities used to finance its leasing and rooftop solar businesses, Tesla hasn’t issued new stocks or bonds since mid-2017, when it raised $1.8 billion by selling its first unsecured bonds, the Journal notes.

Since then, Tesla has sought to generate cash through its own operations, succeeding in the second half of last year though falling short in the first three months of 2019. Last month, it also secured a credit line worth around $520 million from Chinese banks to help fund the factory it is building in Shanghai.

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