Tesla Inc. (NASDAQ:TSLA) is seeking to raise about $1.5 billion through its first-ever offering of junk bonds. Junk bonds are lower-quality investments that offer higher yields. Tesla Chief Executive Elon Musk is betting that bond investors will be as eager as stock investors to back the company.
The planned offering is Tesla’s first-ever attempt to access traditional debt markets. The company said the money will be used to “strengthen its balance sheet during this period of rapid scaling with the launch of Model 3,” and for general corporate purposes. Musk said Tesla was planning on raising new capital on the company’s Aug. 2 second quarter earnings call.
The financial details of Tesla’s bond are not yet known. The bond will price later this week after the company meets with credit investors. The credit investors will weigh a number of factors when evaluating the company, including its high cash-burn rate and its growth potential.
The U.S. luxury electric car maker is searching for fresh sources of cash to ramp up production of its new Model 3 sedan. The Model 3 is its least pricey car, with a $35,000 base price, and is designed to be a mass market vehicle. Tesla said last week that it had 455,000 net pre-orders for the Model 3.
Tesla is burning through roughly $1 billion a quarter to finance the Model 3 ramp-up. Mr. Musk, the company’s founder, wants to take production of the vehicle from zero to 400,000 or more a year in just 18 months. That costs a lot of money. At the end of the June quarter, it had more than $3 billion in cash on hand, compared with $4 billion on March 31. According to its latest quarterly filing with the Securities and Exchange Commission, the company has total recourse debt of $5.6 billion and non-recourse debt of $2.5 billion.
The automaker’s debt load increased significantly when it bought solar panel maker SolarCity last year. Other investments have been the development of Tesla’s ‘Gigafactories’ and an in-home electric power station called Powerwall. The company said it expects capital expenditures of $2 billion in the second half of this year. Most of that amount will be going towards boosting production at its Fremont, California assembly plant and a battery plant in Reno, Nevada.
Tesla has been using a combination of equity offerings and convertible bonds to raise cash for its operations. In March, the company used a convertible debt offering to raise $1.4 billion. The convertible debt sold in the past yields between 0.25 percent and 2.375 percent and can be exchanged for equity at certain prices. Inclusive of its 2010 initial public offering, Tesla has raised nearly $4.5 billion through stock sales.