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'Musk Magic': Tesla Sells $546M of Bonds as Buyers Can't Get Enough

Image: 'Musk Magic': Tesla Sells $546M of Bonds as Buyers Can't Get Enough
(Getty/Jerry Lampen)

Thursday, 01 February 2018 01:47 PM

Tesla Inc. sold $546 million of auto lease-backed bonds Thursday, giving Elon Musk a more conventional source of funds after he sold out of a batch of 20,000 flamethrowers to help pay for his proposed transportation tunnels.

The sought-after debt deal allowed Tesla to slash the risk premiums it would pay on the notes. They were sold to yield between 2.3 percent and 5 percent. Investors had at the initial offered prices put in orders for as much as 14 times what the electric-car maker intends to sell on some slices of an asset-backed security, according to people familiar with the matter.

Tesla marketed bonds tied to leases of its Model X and Model S vehicles. It’s the company’s inaugural auto ABS deal after charming buyers in the equity, convertible-bond and junk-debt markets. Tesla initially dangled juicy yields to lure investors, as much as 2.9 percentage points over benchmarks on lower-rated portions of the debt. It was later able to cut that margin to 2.65 percentage points, thanks in part to its reputation as a well-known innovator with a charismatic chief and a hotly anticipated product.

‘Musk Magic’

“It’s got the Elon Musk magic to it,” said John Kerschner, head of securitized products at Janus Henderson Investors, which manages $360.5 billion. “It just makes for an easier sale.”

Tesla didn’t respond to requests for comment.

The successful deal bodes well for Tesla’s future fundraising efforts, a perpetual concern for the company as it ramps up production for its Model 3 mass-market car. The firm could burn through $4.2 billion this year, according to Barclays Plc analyst Brian Johnson. The carmaker plans to become a regular issuer of auto ABS, according to people familiar with the matter.

Demand for debt backed by consumer payments such as auto leases has been booming, sending risk premiums on auto ABS deals to some of the lowest levels since 2007, according to Bloomberg Barclays index data.

With Tesla, investors had to weigh uncertainties about the resale value of electric cars -- a relatively sparse data point -- against the fact that lessees on average had high credit scores and the bonds mature in less than three years.

‘Split Market’

“It’s definitely a split market,” said Jennifer Thomas, an analyst who studies mortgages and structured bonds at Loomis Sayles & Co., which manages $268 billion. “We preferred to play it cautious.” She called investor demand for the deal “extreme.”

Musk recently grossed $10 million by selling $500 flamethrowers through his Boring Co. to raise money for two tunnel projects, one in Southern California and the other connecting New York and Washington. The tunnels would contain high-speed underground transportation systems.

Tesla’s previous forays into the debt markets have been mixed. Investors greeted its August junk-bond sale with euphoria, allowing the Palo Alto, California-based carmaker to increase the deal’s size. But the notes plunged below their selling price almost immediately after the deal closed on concerns about Tesla’s cash flow. They haven’t recovered. A slate of convertible notes, however, trade well above par, and the company has become the most frequent issuer in the market for bonds backed by solar contracts.

Though investors were ravenous for the auto-loan asset-backed deal, Kerschner said it was unlikely that many buyers were Musk superfans dabbling in the ABS market. But investors who might typically look at investment-grade and high-yield debt have increasingly fallen in love with the structured-credit market as yields shrink across fixed income.

“What we’ve seen is a lot of crossover buyers,” said Glenn Bowling, head of ABS credit at Invesco Ltd., which oversees $938 billion of total assets. “Depending on where you are, further down in the capital structure you can pick up a little bit of yield.”

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Tesla Inc. sold $546 million of auto lease-backed bonds Thursday, giving Elon Musk a more conventional source of funds after he sold out of a batch of 20,000 flamethrowers to help pay for his proposed transportation tunnels.
tesla, bonds, buyers, musk
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2018-47-01
Thursday, 01 February 2018 01:47 PM
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