There’s covenant-lite and then there’s “zero covenant” junk debt, and moments ago Tesla just sold $1.8 billion of the former, upsizing what was previously expected to be a $1.5 billion issue. The deeply junk “B3/B-” rated bond was priced at par to yield 5.25%, with Goldman – who famously slashed its Tesla price target to $180 a month ago – as lead left underwriter. It was unclear how many times the offering was oversubscribed but one guess offered was “many.”
The details of the offering:
- Issuer: Tesla Inc
- $1.8b, up from $1.5b, 8NC3 sr notes
- Launch: 5.25% (Talk 5.25%)
- Maturity: 08/15/2025
- Pricing at par
- Trade date: Aug. 11
- Settles Aug. 18
- 144a for life
- Rated B3/B-
- Bookrunners: GS/MS/BARC/BofAML/C/DB/RBC
- Proceeds to strengthen balance sheet and GCP
- Information from person familiar with the matter, who is not authorized to speak publicly and asked not to be identified
As for the reason why the bond is, as we call it, “zero covenant”, Bloomberg explained two days ago that Tesla’s biggest assets, its Gigafactory has been carved out from the debt incumbrance basket, meaning when, not if, Musk needs to raise more debt, he can simply layer the extsing notes under a new priming offering that assures those who ran to give Musk $1.8 billion today get nothing back. Here’s Bloomberg:
Valerie Potenza, the head of high-yield research at Xtract Research LLC, said “it’s a very lousy set of covenants.” … analysts combing through terms of the company’s plan to raise $1.5 billion with its debut offering in the junk-bond market [are] citing language that exempts Gigafactory 1 from the usual curbs that would prevent Tesla from using the factory as collateral for even more debt.
The result: Buyers of these unsecured, high-yield bonds could find themselves buried under a mountain of newer, higher-priority debt sold in the future.
“To carve out an asset, especially one that would be considered a very valuable asset, is a meaningful exclusion,” said Alexander Diaz-Matos, an analyst at Covenant Review. “That’s important, because that is considered the crown jewel in the Tesla empire.”
The offering also contains permissive covenants normally granted to companies with much higher ratings, as well as redemption terms that favor the company, Diaz-Matos said.
Luckily, the Fed has not made everyone into an idiot just yet:
Mark Holman says he’ll pass. The chief executive officer of London-based TwentyFour Asset Management, which manages $13 billion, said Tesla will need to raise more debt because it’s burning so much cash, and it’s likely to layer on new secured bonds. At this early stage of expansion, a company like Tesla should be funded with equity, Holman said.
“No way am I buying it,” he said. “We are only at the very start of electric cars. Tomorrow, the German carmakers could all get together and fund a new type of battery. Where will Tesla be then?”
The answer, Mark, is raising even more debt, especially since at the current burn rate, today’s proceeds will last Tesla about 3-6 months before it has to raise even more debt, slamming the 18 year old hedge fund managers who just couldn’t wait to give Musk their money in exchange for a paltry 5.25% coupon.
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