Tesla's Gigafactory Is Out of Reach for Its New LendersBy and
Bond offering carves out Gigafactory 1 from curbs on borrowing
Terms could allow Musk’s venture to add layers of senior debt
Elon Musk calls Tesla’s mammoth battery factory in Nevada an “alien mothership.” For the carmaker’s newest lenders, the plant might as well be in outer space.
The billionaire coined that moniker for Tesla Inc.’s Gigafactory 1 as he waxed poetic about his company’s future on an Aug. 7 call with would-be bond buyers. It’s the world’s biggest battery factory and central to Tesla’s plans for mass production of its new Model 3 electric car. Musk invited his audience to come tour the plant near Reno.
But the newly minted noteholders might find Musk’s mothership isn’t much help to them if Tesla lands on hard times. That’s the conclusion of analysts combing through terms of the company’s plan to raise $1.5 billion with its debut offering in the junk-bond market. They’re 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."
Representatives for Tesla and Goldman Sachs Group Inc., which is leading the bond sale, declined to comment.
In a market where investors willingly gobble up whatever new debt is on offer, the terms probably won’t hamper the bond sale, according to debt analysts. Junk-rated companies have taken advantage of insatiable appetite for yield by stripping protections that investors would have insisted upon in another era, and buyers may not bother amid the buzz that surrounds Musk’s clean-energy ventures. The stock is up more than 1,000 percent in five years.
Nevertheless, said Valerie Potenza, the head of high-yield research at Xtract Research LLC, "it’s a very lousy set of covenants."
Typically, a bond offering will flag the company’s most important asset and cap the amount of secured debt that can be tied to it, according to Diaz-Matos. In this case, Tesla has done the opposite, he said, giving the Palo Alto, California-based company flexibility to raise more money using Gigafactory 1 as collateral, which would push previous creditors lower in the pecking order to get repaid in case of default.
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.
Musk, 46, isn’t one to dial down expectations or stay away from painting colorful imagery of his products. When Tesla was courting equity investors during its initial public offering roadshow, he described the company as a "freaking technology velociraptor" set to revolutionize the world. On an earnings call last year, he said a California factory would soon be an "alien dreadnought" that would efficiently pump out new cars.
"Words are just words," Musk told investors this week as he invited them to visit Gigafactory 1, which is still growing. “You need to experience this."
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?”
— With assistance by Dana Hull, Anne Riley Moffat, and Dan Wilchins