Bond investors give Tesla a $1.8 billion endorsement

UPDATED: 8/11/17 9:17 pm ET - adds details

Debt investors proved no more immune to Elon Musk's charms than their swooning counterparts in the stock market.

Tesla Inc. raised $1.8 billion in its debut bond sale on Friday, boosting the amount by $300 million to meet demand. The eight-year bonds were priced at a record-low yield of 5.3 percent -- a touch higher than initial talk of 5.25 percent. They'll help fund the ambitious rollout of the Model 3, the linchpin of Tesla CEO Elon Musk's plans to turn Tesla into a mass-market vehicle maker.

Demand is no problem for Tesla, with almost half a million current reservations, according to Musk. The real hurdle for Tesla will be to produce the vehicle on a scale that the automaker has never come close to achieving before. Musk himself told employees last month, "we're going to be in production hell" trying to ramp up output in the second half.

Production hell just got a little more manageable after Friday's bond sale.

"Take it when you can," Hitin Anand, an analyst at CreditSights, said in an interview. "It made sense for Tesla -- what they really need is a lot of cash."

The 5.3 percent coupon is a record low for a bond of its rating and maturity, according to data compiled by Bloomberg. The sale was managed by Goldman Sachs Group Inc., Morgan Stanley, Barclays, Bank of America Corp., Citigroup Inc., Deutsche Bank and Royal Bank of Canada.

Marketing extravaganza

Musk, 46, brought his charm offensive to the debt market at a meeting for prospective bond buyers at a Manhattan hotel earlier this week. He dialed in, rather than attending in person, and came away with orders for $600 million after just a few hours, according to investors briefed on the matter.

The session, which featured a gleaming blue Model 3 on display, was part of a four-day sales campaign that included an invitation from Musk for investors to tour the company's assembly plant. The tactics worked, as bond buyers proved willing to overlook the company's negative cash flow and its repeated trips to capital markets to bolster its balance sheet.

The debt offering, Tesla's first of non-convertible bonds, represents the latest sign of froth in the high-yield market, where investors have been turning a blind eye to bond-market basics in search of yield.

"If you think about the 'early adopter' concept, the same may apply to this bond for certain investors," said Jon Duensing, director of investment-grade credit at Amundi Pioneer, which oversees $82.4 billion. "They may be investing due to the uniqueness of the offering rather than the value."

People at the Manhattan meeting had estimated that the company could wind up paying no more than 5 percent on the junk-rated bonds. The Bloomberg Barclays High Yield Index closed at a five-week high of 5.71 percent on Thursday, amid escalating tension in the Korean Peninsula.

Tesla's unsecured notes will rank bondholders similarly to their convertible-bond counterparts, though they won't reap the same upside reward should the Model 3, or any other success, propel the stock even further. If the company later decides to issue secured debt, unsecured holders would be pushed lower on the capital structure with less priority to get paid back if the company runs into financial trouble.

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