Tesla seeks $1.5 billion junk bonds issue to fund Model 3 production

By Nick Carey

DETROIT (Reuters) - Tesla Inc said on Monday it would raise about $1.5 billion through its first-ever high-yield junk bond offering, as the U.S. luxury electric car maker seeks fresh sources of cash to ramp up production of its new Model 3 sedan.

The debt offering marks Tesla's debut in the junk-bond market and the company will start road-shows on Monday, IFR reported, citing lead bankers on the deal.

Tesla has been riding high on investor expectations that its Model 3 will be a mass-market hit, with shareholders pushing its market value above that of General Motors Co and Ford Motor Co , the top two U.S. automakers that produce millions of cars each annually.

But Tesla has yet to make an annual profit and its stock is a favourite among short-sellers, who continue to bet Tesla will fall short of its shareholders' high hopes.

So far, Tesla has been raising money to pay its bills with a combination of equity offerings and convertible bonds, which eventually convert into shares. In March, the company raised $1.4 billion through a convertible debt offering.

Following the announcement, Standard & Poor's reaffirmed its negative outlook for the automaker and assigned a "B-" rating for the bond issue - deep into junk credit territory. S&P also maintained its "B-" long-term corporate credit rating on Tesla.

"We could lower our ratings on Tesla if execution issues related to the Model 3 launch later this year or the ongoing expansion of its Models S and X production lead to significant cost overruns," S&P said in a statement on the bonds.

Moody's assigned a junk "B3" rating to the bond issue and said the company's rating outlook was stable.

The rating agency said the overall company's "B2" rating was supported by the fact that if Tesla ends up in serious financial trouble, its brand name, products and physical assets would be of "considerable value" to other automakers.

"The major challenge facing the company during the next twelve months will largely be the considerable execution risks associated with the rapid ramp-up in production of a totally new vehicle," Mood's senior vice president Bruce Clark said in a statement.

The automaker's debt load increased significantly last year when it bought solar panel maker SolarCity.

CFRA equity analyst Efraim Levy said the bonds provide Tesla with funds "at least into mid-2018."

"There is a risk they could still run out of money," he said. "Then you'd go back to the equity markets and hope it's not too late" to raise more money.

BURNING CASH

The latest effective yield on single-B rated bonds maturing in seven to eight years, the class for a Tesla issue, is around 5.5 percent, according to Bank of America/Merrill Lynch Fixed Income Index data.

Tesla's bond will price later this week after several days of meetings with credit investors, who will weigh factors including the absence of a borrowing history, its lack of profit and its high cash-burn rate against its growth potential and its attractiveness as an environmentally-friendly "green" issuer.

Ultimately, the depth of investor interest will determine the bond's interest rate.

Elon Musk-led Tesla is counting on the Model 3, its least pricey car, to become a profitable, mass market manufacturer of electric cars.

Tesla said last week that it had 455,000 net pre-orders for the Model 3, which has a $35,000 base price, and that the sedan was averaging 1,800 reservations per day since it launched late last month.

At the launch, Musk, however, warned that Tesla would face months of "manufacturing hell" as it increases production of the sedan.

Tesla had over $3 billion in cash on hand at the end of the June quarter, compared with $4 billion as of the previous quarter and $3.25 billion a year earlier.

The company has said it expects capital expenditures of $2 billion in the second half of this year to boost production at its Fremont, California assembly plant and a battery plant in Reno, Nevada.

Tesla's cash burn has prompted short-sellers like Greenlight Capital's David Einhorn to bet against the Palo Alto, California company.

Musk said last week the company was considering debt to expand cash on hand.

Goldman Sachs, Morgan Stanley, Barclays, Bank of America Merrill Lynch, Citigroup, Deutsche Bank and RBC are the book-runners on the bond offering, IFR reported.

Shares of Tesla, which have risen 67 percent this year, were down 9 cents at $356.82.

(Additional reporting by Paul Lienert in Detroit, Narottam Medhora and Laharee Chatterjee in Bengaluru; Editing by Sai Sachin Ravikumar and Nick Zieminski)