Tesla has planned to raise $1.5 billion through junk bonds to support its Model 3 plans.
“The notes will be senior unsecured debt obligations of Tesla,” the EV maker said in a statement. “The interest rate, redemption prices and other terms of the notes are to be determined.”
Big Model 3 plans need big money
Tesla has grand Model 3 plans, which means that cash burn will be quick. Previously, Musk stated that Model 3 sales would reach approximately 500,000 vehicles per year. However, after the Model 3 event last month, Musk is now expecting over 700,000 units annually, notes Electrek.
Last month when the first 30 Model 3s were handed over to Tesla employees, CEO Elon Musk stated that Tesla will face “at least six months of manufacturing hell” as it works to make 5,000 Model 3 cars every week by December.
To achieve its ambitious Model 3 plans, the company already shelled out $1.2 billion in the second quarter ahead of the launch of the Model 3. By the end of the second quarter, the Palo Alto-based company had $3 billion in cash on hand, and it is looking to spend another $2 billion in the second half of this year.
What experts have to say
So far, Tesla has been raising money from a mix of equity and convertible bonds, mainly to pay its bills. In March, the company raised $1.4 billion through a convertible debt offering.
Tesla has hinted at using the debt markets for funding, but according to Cowen & Co. managing director and senior analyst Jeffrey Osborne, only a handful of analysts were expecting it to happen so soon.
“The challenge with doing it now is that the company is at a transformational phase,” the analyst said. “Debt holders want to see stable cash flow, and they do not have a lot to hang their hats on in terms of predictability.”
Robbie Goffin, a bond expert and managing director at FTI Consulting, told Reuters that usually bond investors stay a safe distance away from companies that do not make money. However, in the case of Tesla, they would probably be more “forgiving.”
According to a report from IFR, the EV maker was planning to start pitching to potential investors on Monday. CFO Deepak Ahuja was recently in talks with bondholders in a meeting hosted by Goldman Sachs. The main agenda of the meeting was to discuss opportunities about the new bond offer, notes Electrek. During the second-quarter earnings call, Musk also hinted at raising funds through debt rather than equity.
Model 3 is a special car
The Tesla Model 3 offers a strong platform for the company, given its attractive features. The Model 3 is the first vehicle to have the speedometer and other gauges on the 15-inch touch-screen located in the center of the dash. The display will allow the driver to easily control information such as battery life, speed, and display, among other things.
With the Model 3, Tesla has also removed the need for physical keys. The owner will be able to push their Model 3 credentials with their smartphone via Bluetooth. The car will automatically be unlock, depending on the proximity of owner.