The latest Tesla capital raise seems to be raising even more eyebrows than usual, if you can believe that. Earlier this week, the automaker announced plans to sell $1.5 billion in senior notes with a due date in 2025, and apparently, it has already secured more than a third of that. However, investors who bought the notes could be in for a nasty surprise if things go south for Tesla, as so some analysts are predicting.

tesla capital raise
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Tesla capital raise: just say the magic words

Citing investors familiar with the matter, Bloomberg reports that CEO Elon Musk met with bond buyers on Monday in Manhattan and charmed his way to $600 million in orders in only “a few hours.” And that was only the first part of a four-day series of meetings to secure funds for the Tesla capital raise. According to Bloomberg’s sources, Tesla may pay 5% or less on the automaker’s junk bonds, as interest rates and yields are incredibly low.

Musk already worked his charm on stock investors by tapping them for funds eight times in only seven years, but apparently, he’s charming enough to convince debt investors to hand over millions of dollars too. This time around, the magic words are “the Model 3,” a tasty, mass market morsel investors have been salivating over on the assumption that Tesla can be just as successful in mass market cars as it has been in luxury vehicles.

Concerns about debt and cash burn

In a note to investors dated Aug. 8, Bank of America Merrill Lynch analysts John Murphy and Aileen Smith noted that this Tesla capital raise is no surprise because the second half of this year is expected to bring “elevated cash burn,” which hedge fund manager David Einhorn has also been speaking out about for some time. Tesla is catching up on its capital expenditures and the costs associated with ramping up production of the Model 3.

They added that the company’s second-quarter cash balance of $3 billion and “comfort cash level” of $1 billion were probably not enough to supported the more than $2 billion in cash burn they’re expecting the rest of this year. They had already accounted for a $2 billion debt raise in their estimates for the second half of the year, so they’re leaving them the same, along with their Underperform rating and $155 price objective.

Feeding the whale

The BAML team added that this Tesla capital raise is the second this year, which is the tenth consecutive year in which the company has raised capital. Further, Tesla’s total corporate debt (excluding bonds specific to SolarCity) and net debt have more than doubled over the last three quarters. Meanwhile, the automaker’s cash burn rate continues to rise, and after 14 years, it hasn’t turned the corner on profits or free cash flow.

They also warned that Tesla’s capital structure is “becoming increasingly less favorable for shareholders.” Additionally, they said that the more the company succeeds, the more capital it might need and the less likely its operations will be able to support those needs. Musk has said they plan to deliver 500,000 vehicles a year starting next year and 1 million annually by 2020. The BAML team noted that this will likely mean another Tesla capital raise will be needed to support this steep production ramp.

And there’s something even worse for those who buy the notes in this latest Tesla capital raise. According to Bloomberg, the language in the terms of this raise prevents Tesla’s massive Gigafactory 1 from being used as collateral for more debt. If this turns out to be the case, debtholders from this capital raise are likely to find the debt they own “buried under a mountain of newer, higher-priority debt sold in the future.”

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