This debt offering will be a departure from Tesla’s previous fundraising vehicles. The ratings agencies didn’t run for the hills though. S&P wrote:
We affirmed our ‘B-‘ ratings on Tesla despite the higher debt leverage following the proposed offering to reflect its improved liquidity. The offering will provide the company with an adequate cushion to fund its upcoming maturities and significant capital expenditures (capex) over the next 12-18 months following the launch of its Model 3.
And Moody’s commented:
The stable outlook reflects Moody’s expectations that the shipment levels and profitability of the Model 3, combined with an adequate liquidity profile, will enable the company to materially strengthen its operating performance and credit metrics during 2018.
Tesla’s debt is considered relatively high-risk. But the verdict from the ratings agencies is that taking on additional debt at this juncture reduces the overall risk to Tesla’s balance sheet.
But borrowing more isn’t the only way Tesla can raise funds. Here are 5 others and some pros and cons to each:
Get the latest Tesla stock price here.
Over the past two years, Tesla has raised more money by selling additional shares to investors. By and large, this has worked out well because while Tesla stock has surged and swooned, the trajectory has been mostly up. During the first half of 2017, shares gained 65%.
Those gains in the company's market value mean -- very simply -- that Tesla can raise more by selling stock today than it could six months ago.
The drawback to using the stock market as an ATM is that although Tesla gets funds, and the banks that assist in the equity raise get fees, existing shareholders see their stakes diluted. An ever-upward share price takes the sting away, but over the long-term investors might start to conclude that Tesla is taking advantage of them as they own less and less of the business.
Then again, this is a cash burning business and it always has been.
This is what Tesla is planning to undertake now in order to raise another $1.5 billion. The pros are that you don't sell more equity and keep existing shareholders undiluted. You also provide investors with an opportunity to pursue a higher yield if your debt hasn't earned the highest rating.
'Investment grade' debt is lower yielding, and so investors sometimes see it as a place to park money (it pays better than a money market account). Tesla's debt will have a higher yield, so there could be robust demand for it in the current low-interest-rate environment.
But debt can also be a burden. Too much debt means you spend capital that could otherwise be re-invested, paid out to shareholders in the forms of dividends of buybacks, or used for R&D. Instead, all that cash is going to service the liability.
And in bankruptcy, bondholders can fight to reclaim part of their investment.
Tesla has issued convertible debt in the past. The biggest pro is that this type of debt doesn't immediately dilute existing shareholders, and when people are bullish about a high growth company offering them the opportunity to buy stock in the future is an added incentive.
The biggest con is that it can eventually convert, and the timing of the equity conversion isn't controlled by the issuer. It can obviously be a pretty good deal for a buyer, however. As an investor, you get the best of both worlds: a stream of payments of the debt and vindication for a long-term view if the debt later converts to equity with substantial appreciation.
This is sort of the credit card of corporate finance. The big pro is that the funding is there, but you don't have to draw on it. It can act as insurance against future capital raises and debt offerings.
The con is that if you do draw it, overall debt is increased -- and a negative signal goes out the markets: you're cashing in on your insurance. This can hurt the stock price, which in turn reduces the value of future equity raises.
Tesla has about 450,000 pre-order for its new Model 3 sedan -- at $US1,000 a pop! According to the company, 1,800 new ones are coming in every day.
Pro: The $US1,000 pre-orders add up and provide Tesla with operating revenue because the company doesn't set them aside in an escrow account, even though they're refundable.
Con: They're refundable, and Tesla has to build and deliver a car to book full price.
Tesla could raise money in other ways. For example, it could sell intellectual property or services.
But in those cases, it would give somebody else the opportunity to make money that Tesla could make entirely itself. It could also surrender a competitive advantage.
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