Bond investors on Friday provided a $1.8 billion boost to Tesla’s balance sheet by getting the automaker’s first foray into the U.S. junk bond market, where investors have raced to secure reasonably higher returns.
Those robust returns, although have diminished as a strong reservoir of money prepared to deploy in the riskiest areas of the fixed income market has pushed them to near their lowest levels in 3 years. That has provided junk-rated companies such as Elon Musk’s U.S. auto company the opportunity to raise money inexpensively.
The automaker sold $1.8 billion of eight-year unsecured bonds at a yield of 5.30 percent, the Palo Alto, stated in a filing with the Securities and Exchange Commission.
The bond was sold at par, according to a source.
Tesla initially wished to sell $1.5 billion worth of debt however enlarged the offering because of huge demand, according to Reuters. The yield was a little higher than the 5.25 percent pointed out at the initial launch.
Cash profits will help fund production of Tesla’s Model 3, which it is counting on to hit the mass market and finally help the company make a profit. Tesla aims to boost production to 500,000 cars next year, about 6 times more than its 2016 output.
“It’s a turning point for a company from a relative unknown to exactly what it is today,” stated David Knutson, head of credit research at Schroders Investment Management.
The company was established by Musk in 2003, has raked earnings back into its organisations, which now consist energy storage.
At the launch of the Model 3, with a base cost of $35,000, Musk cautioned that Tesla would face months of “manufacturing hell” as it boosts production of the sedan.
The capability of the high-yield sector, which some experts and financiers regard expensive, to soak up debt supply from a first-time company such as Tesla suggests its resilience, at least in the meantime.
“I won’t call it a bubble,” stated Andrew Feltus, co-head of high yield and bank loans at Amundi Pioneer Asset Management. “The (market) fundamentals are pretty good.”