Tesla ends 'Spartan diet' and seeks $2.3 billion to fund expansion
Tesla Inc will raise up to $2.3 billion in new capital, renouncing what Elon Musk called a "Spartan diet" and easing Wall Street concerns about the money-losing company`s ability to overcome a drop in sales and build new product lines.
Tesla`s plan to issue shares and convertible debt comes after the company repeatedly pushed back forecasts for turning a profit. The company faces expensive challenges, including launching production in China, overhauling its U.S. retail and service operations and developing new models, including the high-volume Model Y SUV and a Semi commercial truck.
Many analysts had calculated that Tesla - which burned through $1.5 billion in the first quarter - would not be able to carry out its growth plans without new cash.
"The market seems to be breathing a sigh of relief. Now they need to get back to work, and start selling more cars," said Roth Capital analyst Craig Irwin.
Shares of Tesla rose 4.3% to close at $244.10, while the yield on Tesla`s existing $1.8 billion junk bond fell to its lowest level in over a month.
"This is how they pay for the factory in China, the Model Y, their 2020 goals, said Ross Gerber, chief executive of investment firm Gerber Kawasaki.
Raising $650 million in new shares and $1.35 billion in debt, while giving underwriters the option to buy an additional 15 percent of each offering, could potentially raise the proceeds to $2.3 billion.
Chief Executive Officer Musk would also pitch in $10 million of his own money, Tesla said in a filing.
For over a year, Musk had insisted that the money-losing Silicon Valley automaker had no need for a capital raise, saying that high Model 3 volume and efficiency would push the company to profit in all quarters of 2019. That changed with a $702 million loss in the first quarter, and warnings that profit would be delayed until the latter half of the year.
Raising capital should not be a substitute for operating effectively, Musk said last month, suggesting that a capital raise could be near. "It`s healthy to be on a Spartan diet for a while," he said.
Before Tesla`s announcement on Thursday, however, analysts speculating about a capital raise had cautioned that the company had missed optimal timing - last year`s third quarter, when the company posted a profit.
Tesla has reported four profitable quarters since it went public in June 2010.
The company has made a series of moves to rework pricing strategies for its cars following the reduction of a $7,500 federal tax credit for Tesla buyers by half, a decline that hurt first-quarter deliveries.
Musk also has been distracted by a public feud with U.S. regulators. Shares in the company have dropped 28% since the beginning of the year. LOWER COUPON
Tesla ended its first quarter with $2.2 billion in cash. In 2019, it expects capital expenditures of $2 billion to $2.5 billion and about $2.5 billion to $3 billion annually for 2020 and 2021.
Throughout its history, Tesla has raised funds through bank loans, equity sales, convertible notes, a junk bond sale, securitization of its vehicle leases and solar asset-backed notes.
Convertible bonds, which permit an issuer to repay creditors in new stock rather than cash if certain conditions are met, have been among Tesla`s most preferred vehicles for raising capital. They typically allow a borrower to raise capital at a lower interest rate than an ordinary bond because the investor has the potential for a greater return should the conversion terms be met.
The convertible notes announced on Thursday are seen carrying a coupon rate of between 1.5% and 2.0% with a conversion premium of between 27.5% and 32.5% over the reference price for Tesla shares at the time of the sale, according to a trader who saw preliminary marketing materials for the deal.
The convert is being marketed with a higher conversion premium than its last convertible bond, issued in March 2017, meaning Tesla shares will have to rise by an even larger magnitude to trigger a conversion to equity.
Tesla`s last convert was a $977.5-million security maturing in March 2022 that featured a 2.375% coupon with a 25% conversion premium to the stock`s reference price of $262 per share at the time of the sale. That bond can be converted to equity at a price of $327.50 per share, which is currently around 36% above Tesla`s current share price of around $240.
In March, Tesla had to repay a $920 million convertible in cash because the stock failed to reach the conversion price of around $360 per share. Only one of the convertibles it or its Solar City unit have issued has met the terms for conversion.
The yield on Tesla`s existing $1.8 billion junk bond fell to its lowest level in over a month at just over 8 percent on Thursday after the news, roughly 2.7 percentage points above its 5.3% coupon.
Goldman Sachs and Citigroup will manage the offering. BofA Merrill Lynch, Deutsche Bank Securities, Morgan Stanley and Credit Suisse are the additional book-running managers.
Goldman, Morgan Stanley and Bank of America have $507 million in outstanding personal loans to Musk, with his Tesla shares put up as collateral, according to Thursday`s prospectus. If Tesla`s stock falls, the banks could force him to sell some of those shares. Tesla`s previous prospectus in 2017 showed Musk had $624 million in personal loans from banks, backed by his shares.
In a sign of Wall Street`s concern about Tesla, Goldman Sachs recommended selling Tesla shares in an April 25 report, putting a 12-month price target of $200.
(This article has not been edited by Zeebiz editorial team and is auto-generated from an agency feed.)
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