Tesla Bond Update

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About: Tesla, Inc. (TSLA)
by: Ploutos
Summary

Nearly two months have passed since Tesla's debt IPO. Bonds are off 5+ points despite a broader rally in high-yield credit.

Model 3 delays and a potential removal of the electric vehicle tax credit weighed on the company's securities.

Tesla Energy did successfully tap another financing market this week in an interesting transaction.

On August 11th, I posted an article on Tesla's (TSLA) bond market IPO, suggesting to readers that investors in the soon-to-price debt deal "just are not being compensated for the risk in this business."

Fast forward nearly two months, and the Tesla 5.3% 8/15/25 was priced at $94.91 to yield 6.13%. That pricing level comes from Bloomberg BVAL. Pricing in the over-the-counter bond market is more opaque than the exchange-traded markets, so hopefully a look at this pricing is valuable to Seeking Alpha readers. By comparison, the two largest high yield bond ETFs - the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Bloomberg Barclays High Yield Bond ETF (JNK) - have posted +2% total returns over that time horizon while the Tesla bond has fallen by over 5 points.

It was a bad week for Tesla with the Model 3 production delays potentially further weighing on the company's financials. The release of the Republican tax plan and the possibility that the $7,500 electric vehicle tax credit may be repealed further pressured Tesla's stock and bonds.

While it was a bad week for Tesla, the company did quietly print another interesting bond deal in TES 2017-1. In the asset-backed securitization market, Tesla Energy (formerly known as Solar City) priced $340M of new debt backed by leases and purchase power agreements on its residential solar panels. The source of repayment here is a pool of thousands of residential customers, typically with prime credit scores. Cash-strapped Tesla is able to pull forward these future payments through this debt deal.

The $265M senior tranche, rated A- by Kroll, priced at 4.33% for a 9.8-year average life. The unrated $75M subordinated tranche priced at 7.75%, a yield greater than where Tesla's unsecured debt trades even after the recent sell-off. The solar ABS market is relatively nascent, and while Solar City has made installations since 2006, most of its customers have not been through a full business cycle, adding uncertainty to the riskiness of financing these long-term leases.

Tesla remains a quixotic company for debt investors. Rarely do you see the market willing to finance a company with this record-level of cash burn, but you also rarely see below investment grade companies with a greater than $50B market capitalization either. Equity investors must understand that while Tesla has been able to successfully tap the unsecured corporate credit market and the ABS market recently that the company will likely need to raise meaningfully more equity to ramp its ambitious plans to become an electric car and renewable energy giant.

It will continue to be a fascinating story to watch. If you are worried about the financial health of Tesla, you do not want to own the debt or the equity. Over the past two months, the bond market has priced in a higher risk of financial distress. If you believe in the long-term vision of Musk and the tantalizing possibility that this is a company that will revolutionize key markets, then you want to own the company's upside through its equity and not its debt even after the recent selloff has presented a more attractive yield on the bonds.

Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.