How Good Are The Terms Of Tesla's Latest Bond Offering?

Feb.28.14 | About: Tesla Motors (TSLA)

The pricing of Tesla Motors (NASDAQ:TSLA) convertible bond sale has been reported and once again the terms are absurdly favorable. All the convertibles have an equity conversion premium of 42.5%, which equates to ~$360 per share, based on yesterday's closing price. So far, $800M of the bonds are five-year debt with a coupon payment of 25 basis points and $1.2B are seven-year notes at 125 basis points. These terms are 25 basis points better than the even best projections I'd seen from analysts. The over-allotment provision could still allow another 300 million in bonds to be sold. Tesla critics will grouse about dilution, but the company will likely take some measures to offset that, and it certainly didn't bother investors the last time around.

To recall, when Tesla first placed a joint equity and convertible bond offering in late May, the amount of the sale was increased twice and the coupon rate on the bonds of 1.5%, with a 35% conversion premium. The convertible bonds from that first offering are now actually trading at 3-4% premium, indicating that dilution from them is not occurring yet (although it certainly will eventually). Those terms shocked the market at the time. As I documented here, the terms of that first deal redoubled the short squeeze that had already begun with the first profitable earnings announcement from Tesla. These terms are clearly better (lower interest, higher premium, no immediate equity placement). With over 30% of float shorted as of mid-February another squeeze is certainly possible, but the rebate rate of just half a percent indicates that the official short figure may not be representative of actual bets against TSLA stock, but rather that it is trading on the market dynamics discussed here.

As also discussed in that article, analysts are finally starting to catch on to the idea that Elon Musk's goals are far loftier than becoming the next General Motors (NYSE:GM). As I said back then, Musk seeks instead for his company to become the next Exxon Mobil (NYSE:XOM), which has a market cap over 7 times that of GM. The idea is that Musk's companies become vertically integrated in an all electric economy just like the oil majors have in hydrocarbons. The supercharger network was the first step in that direction. The giga-factory that Tesla is financing with these bonds is the next one. The key though, will be Tesla eventually supplying (or licensing) charging solutions and battery packs to other car companies. No company likes to use a competitor's solution, but Tesla's chargers and battery packs are clearly the best currently on the market. Tesla already supplies electric drive trains to Toyota (NYSE:TM), who still owns TSLA shares. It supplies both drive trains and batteries to Mercedes-Benz, and parent company Daimler (OTCPK:DDAIF) has said they would like to collaborate further.

The terms of Tesla's latest bond sale are very good and its sets the company up to go it alone if necessary. However, if it can make the next sale of licensing its core battery supercharging technologies to other providers, then the company's already bright future becomes assured.

Disclosure: I am long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.