Tesla sells $783 million of prime auto lease-backed debt to investors

By Immanual John Milton

Tesla Inc. sold more than $783 million of prime borrower leases to investors in its second asset-backed securities deal of the year.
 

The electric carmaker began the early marketing phase of the debt sale, led by Societe Generale SA, last week. The sale finished Wednesday with the top-rated slice of the securitization priced at a coupon of 4.827 per cent. 

In comparison, the top piece of a $1.72 billion prime auto loan ABS deal for Hyundai Motor Co. priced Tuesday at a coupon of 4.75 per cent while a $1.29 billion prime auto loan transaction for General Motors Co. paid a coupon of 4.74 per cent. Tesla’s $750 million transaction in March had a top tranche coupon of 5.53 per cent.

The electric-vehicle maker’s sale is the latest in a string of asset-backed transactions from the auto sector as issuers rush to get deals done ahead of any credit market disruptions from the US election. So far in October, carmakers have tapped the securitization pathway for $13.6 billion as they look to sell their loans or leases to institutional investors.

Tesla’s offering hit the market ahead of Chief Executive Officer Elon Musk’s planned reveal of a long-anticipated robotaxi on Thursday while the company struggles with slowing EV sales. 

While Tesla’s ABS issuance reached a record of nearly $4 billion last year, the pipeline has slowed in 2024 with transactions so far totaling just over $1.5 billion. After starting its securitization program in 2018, the electric-vehicle company has tapped the market at least 10 times, but not as frequently as many of its competitors. Ford Motor Co. and GM have each sold more than $13 billion of asset-backed debt this year.

Buyers of such debt risk losses as the resale value of a car declines, which can occur following major price cuts. Lower residual values on a vehicle can force lessors to charge customers more, making leasing less appealing.

Tesla’s vehicles face their own particular challenges as the value of used electric cars have been hit by falling sticker prices on new EVs. The firm’s 25 per cent price cut on the Model 3 is the steepest drop among EVs so far this year, according to an iSeeCars study. Leases as a percentage of Tesla sales have also been declining, a trend that analysts have linked to weak resale values. 

“Tesla’s price reductions, primarily affecting Model S and X, along with the softening in the EV values, may result in lower RV realizations,” according to a presale report from Fitch Ratings, which rated the top tranche F1+sf, indicating a high likelihood of repayment. “The degree of impact is mitigated by structural protections and Fitch’s conservative loss assumptions.”

Tesla’s latest deal comes from its active lease platform, and is made up of more than 26,000 leases with borrowers holding a weighted average FICO credit score of 764, according to deal documents. 

Tesla and Societe Generale didn’t immediately respond to requests for comment.

Issuance in the ABS market is surging. More than $292 billion in deals have hit the market so far in 2024, already surpassing last year’s total. The next milestone is $313 billion set in 2021, according to data compiled by Bloomberg.