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Tesla Model 3 Future Secured By Monster $1.5 Debt Deal

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Tesla, Inc. (NASDAQ:TSLA) is going to look for $1.5 billion in loans in order to keep the lights on at its factories. The firm announced on Monday morning that it was planning to sell that amount in senior notes in order to keep its books looking healthy while it builds the Tesla Model 3.

Last week, when the firm revealed its earnings for the three months through June, Tesla showed that it still had $3 billion in cash on hand. With vehicle shipments not likely to grow massively until the fourth quarter at earliest, cash burn was seen as a problem by many on Wall Street.

Therefore the announcement of a fund raising process is not a surprise, though few seemed to expect the firm to announce the process this early.

Tesla Model 3 requires debt

The notes will be, according to a statement put out on Monday morning, senior unsecured debt. The firm says that the cash will be used to strengthen its balance sheet as Tesla Model 3 production continues. More skeptical readers will guess that means the firm is planning on burning more cash in the quarters ahead.

Tesla Inc nasdaq:tsla - Elon Musk
Photo: Wikipedia/Creative Commons

The notes will come due in 2025. The likely use of the debt, in the first place, is to pay off other debt coming due soon. That’s a process called rolling over of debt. It allows firms to keep the same debt level while still paying off creditors. That’s likely only to be part of the cash need, however. Tesla is also still investing in capital heavily.

Tesla, Inc. (NASDAQ:TSLA) has a lot of expenses, and it’s still losing money for the time being. We don’t know what the terms of this new debt will be. According to the release, the date of the auction and the coupon will be decided by market conditions, among other factors.

Tesla stock is a cash fire

Elon Musk is very confident that it can make a strong profit off of the Tesla Model 3 pretty soon. He said, on an earnings call it’s very likely to hit a 25 percent gross margin on the car before January 2019. That’s not an assurance of positive cash flow, however. The firm spent more than $1.7 billion in the first six months of 2017.

As Elon Musk and CFO Deepak Ahuja have shown in previous quarters, Tesla, Inc. (NASDAQ:TSLA) is capable of making a profit. The firm’s cash problems come from its insatiable need to keep expanding. As long as Elon Musk keeps talking about solar roofs and more Gigafactories, cash burn could remain quite high.

Tesla Model 3 delivery date graph
The production schedule for the Tesla Model 3

At time of writing shares in Tesla had actually moved up on the announcement of the debt deal. In normal circumstances, investors would be skeptical of a bond offering of that size. With the EV innovator, however, investors seem to be happier to find that the company is getting rid of the uncertainty.

We can’t be sure that this will be the last time that Tesla goes to markets looking for cash. In the past the firm has often done hybrid bond and equity deals. For the time being, however, it seems that debt is the only thing Elon Musk wants to take on.

Tesla stock value remains volatile

If you believe that shares are undervalued, or that an equity offering could hurt value, that is the logical thing to do. Mr. Musk doesn’t seem to think Tesla stock is overvalued, however. That means he may be nervous about the robustness of current prices in the face of dilution.

The Tesla Model 3 isn’t out of the woods yet, and the risks facing the firm are still great. Today’s debt announcement will help Musk and Ahuja to guard against those risks, but there could still be a huge amount of volatility to come.

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Paul Shea

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