Just one week after Tesla Inc.’s much-ballyhooed $1.8 billion bond issue and the notes are trading underwater, leading some to question the pricing of the deal.
The 5.3% notes due 2025 last traded at 97.50 cents on the dollar, according to MarketAxess, after touching a low of 97.375 cents during Friday’s session.
The high-yields bonds were reported to have attracted strong demand, with the underwriter Goldman Sachs increasing the size from an original $1.5 billion. Investors appeared to find comfort in Tesla’s
market capitalization of $57.9 billion, which makes it the nation’s biggest car company measured by that metric.
General Motors Co.
currently has a market cap of just $50.8 billion, while Ford Motor Co.
has a market cap of $42.1 billion.
The deal was shopped at a yield of 5.25% during investor roadshows, but was raised to 5.3% at the last minute in what is understood to be an attempt to get investors on side. Telsa is expected to tap the bond market many more times in the future as it raises the funds for its Model 3 production.
“Tesla was an aggressive deal for a company that is not expected to be cash-flow positive for years,” said Gershon Distenfeld, head of credit at asset manager AllianceBernstein.
“At just over 5%, it is not a great risk return,” he said.
In case you missed it: Tesla’s $1.8 billion in new bonds are riskier than usual
A successful Model 3 production scale-up is the cornerstone of Tesla’s expansion plans, which include new passenger and commercial vehicles, solar-power products and the ability to produce cars at a rate of 500,000 by the end of 2018.
Moody’s rated the credit at B2, placing it a full five notches into speculative, or “junk,” territory to reflect what it described as “sizable near-term credit risks” associated with Model 3 production and sales.
The deal also came without many of the customary bondholder protections. As a single B-rated credit, the Tesla notes might be expected to have a full high-yield covenant package, a set of protections for the bondholder to guard the investment by preventing the company from using monies that could be assigned to interest payments for other purposes.
“Anyone who looks at a lot of high-yield bonds would expect more robust protection against future debt,” Valerie Potenza, head of high-yield research at Xtract Research, a sister company of Debtwire, told MarketWatch ahead of the sale. “We think it’s a terrible bond, but people seem blinded by the Tesla story.”
AllianceBernstein’s Distenfeld said investors are still starving for income in a low-interest rate, low-yielding world, and said it is important to be patient — and disciplined — in this market.
“There are companies coming to market that shouldn’t be issuing at all, so you have to watch out,” he said. “The same is happening in the bank loan market, people are afraid of rising rates and enamored of floating-rate debt, so underwriting quality is changing.”
Tesla shares closed down 1.3% Friday, but have gained 63% in 2017, while the S&P 500
has gained 8.3%.