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Tesla plans to raise $1.5B in bonds to fund Model 3

08 August 2017, 12:42 | Hattie Nash

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CEO Elon Musk said last week that the company was considering turning to debt markets to bring its mass market Model 3 electric auto to market.

Investor enthusiasm has catapulted Tesla's market value past General Motors Co. and Ford Motor Co., but bringing out the Model 3 has been costly.

Tesla Inc. (NASDAQ:TSLA)'s stock had its "underperform" rating reissued by equities researchers at Bank of America Corporation in a report released on Thursday.

Interestingly enough, Musk said the launch of the Model 3 had not caused a problem for either the Model X or the Model S. In fact, demand for both vehicles has increased due to the release of the lower-priced auto. Tesla now makes fewer than 10,000 cars per month on average, but almost half a million buyers have placed a deposit for the company's cheapest ever auto.

Elon Musk has thanked his management team for pulling him "back from the cliff of insanity", and encouraging him to design the upcoming Tesla Model Y on the same platform as the newly-launched Model 3.

The company reported $3.04 billion in cash and equivalents at the end of the second quarter and $7.12 billion in long-term debt and $2.26 billion in other long-term liabilities. The company expects to ramp up production of this auto (pricing starts at $35,000), to 1,500 units in the third quarter. In normal circumstances, investors would be skeptical of a bond offering of that size.

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As long as Elon Musk keeps talking about solar roofs and more Gigafactories, cash burn could remain quite high.

At the launch, Musk, however, warned that Tesla would face months of "manufacturing hell" as it increases production of the sedan.

The company has said it expects capital expenditures of $2 billion in the second half of this year to boost production at its Fremont, California assembly plant and a battery plant in Reno, Nevada.

Tesla will raise the money by selling bonds to professional investors, despite the company having $3bn in cash. Rather, Musk is showing his company's commitment to them by not diluting their stock with an equity sale. While RBC capital markets analysts were also positive exiting Q2, analysts at Goldman Sachs, Morgan Stanley and Cowen weren't too optimistic, citing huge Capex and downside risks to the model 3 production ramp-up.

As of the last earnings report the EPS was $-4.85 and is projected to be $-6.23 for the current year with 165,212,000 shares now outstanding.



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