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Debt investors proved no more immune to Elon Musk\u2019s charms than their swooning counterparts in the stock market.<\/p>\n
Musk\u2019s electric-car maker Tesla raised $1.8 billion in its debut bond sale on Friday, boosting the amount by $300 million to meet demand.<\/p>\n
The eight-year bonds were priced at a record-low yield of 5.3% – a touch higher than initial talk of 5.25%.<\/p>\n
They\u2019ll help fund\u00a0the ambitious rollout of the Model 3, the linchpin of Musk\u2019s plans to turn Tesla into a mass-market vehicle maker.<\/p>\n
Demand is no problem for Tesla, with almost half a million current reservations, according to Musk. The real hurdle for Tesla\u2019s chief executive officer will be to produce the vehicle on a scale that the automaker has never come close to achieving before.<\/p>\n
Musk himself told employees last month, “we\u2019re going to be in production\u00a0hell” trying to ramp up output in the second half.<\/p>\n
Production hell just got a little more manageable after Friday\u2019s bond sale.<\/p>\n
\u201cTake it when you can,\u201d Hitin Anand, an analyst at CreditSights, said in an interview. \u201cIt made sense for Tesla – what they really need is a lot of cash.\u201d<\/p>\n
The 5.3% coupon is a record low for a\u00a0bond of its rating and maturity, according to data compiled by Bloomberg.<\/p>\n
The sale was managed by\u00a0Goldman Sachs Group, Morgan Stanley, Barclays, Bank of America Corp, Citigroup, Deutsche Bank AG and Royal Bank of Canada.<\/p>\n
Musk, 46, brought his charm offensive to the debt market at a meeting for prospective bond buyers at a Manhattan hotel earlier this week.<\/p>\n
He\u00a0dialed 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.<\/p>\n
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\u2019s assembly plant.<\/p>\n
The tactics worked, as bond buyers proved willing to\u00a0overlook the company\u2019s negative cash flow and its repeated trips to capital markets to bolster its balance sheet.<\/p>\n
The debt offering, Tesla\u2019s 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.<\/p>\n
\u201cIf you think about the \u2018early adopter\u2019 concept, the same may apply to this bond for certain investors,\u201d said Jon Duensing, director of investment-grade credit at Amundi Pioneer, which oversees $82.4 billion.<\/p>\n
\u201cThey may be investing due to the uniqueness of the offering rather than the value.\u201d<\/p>\n
People at the Manhattan meeting had estimated that the company could wind up paying no more than 5 percent on the junk-rated bonds.<\/p>\n
The Bloomberg Barclays High Yield Index closed at a five-week high of 5.71% on Thursday,\u00a0amid escalating tension in the Korean Peninsula.<\/p>\n
Tesla\u2019s unsecured notes will rank bondholders similarly to their convertible-bond counterparts, though they won\u2019t reap the same upside reward should the Model 3, or any other success, propel the stock even further.<\/p>\n
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.<\/p>\n