Tesla Seen Needing to Recharge Coffers to Make Model 3 Go

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  • Musk’s just kidding about bankruptcy but cash drain is no joke
  • Analysts see need for capital raise as company says it’s set

The Cult of Elon Musk Amid Tone-Deaf Tweets

Now that Tesla Inc. investors know how many Model 3s the carmaker built in the first quarter, they’re focusing on a new question: how Elon Musk’s going to finance the next batch.

Tesla says it won’t need to raise more equity or debt this year, apart from using its standard credit lines, because it expects to assemble cars faster. The company built 2,020 Model 3 sedans in the past seven days and said its production rate should “climb rapidly” this quarter, “laying the groundwork” for strong positive operating cash flow in the third quarter.

But better-than-feared results aside, analysts still expect the company will want to refuel its coffers. The company’s $10 billion debt load is turning into a real burden, with cash dwindling and costs rising for any new borrowing after the electric-car maker’s credit rating was cut last week.

Next Raise

“They still need to come to the market, no question about that,” said CreditSights analyst Hitin Anand, who estimates that Tesla may raise up to $2 billion in the next six to 12 months, likely through a combination of equity and convertible debt. That could be less, however, if the company follows through on its production targets or borrows through its bank credit line, he said.

“Not requiring any more funds for the Model 3 may still be mildly possible, but that does not mean they don’t have refinancing needs,” Anand said.

Tesla ended 2017 with $3.4 billion of cash on hand and is expected to burn through about $2.5 billion this year. With $390 million of debt to pay off this year, that could leave the company entering 2019 with about $500 million of liquidity.

‘Prudent’ Move

If Tesla continues to run through cash at about $600 million a quarter, a capital raise is just a matter of when, according to Bloomberg Intelligence analyst Joel Levington, who says he’s skeptical of plans to scrape by without one.

“Technically they could do that, but is it the prudent thing to do? That’s where I say absolutely not,” Levington said. “All stakeholders would be concerned about that.”

The automaker’s unsecured bonds due 2025 rose about 1 cent on the dollar to 88.42 cents at 12:24 p.m. in New York, according to Trace price data.

Read more: Musk Promises Acceleration of Tesla Vehicle Production: TOPLive

A representative for Tesla, which is based in Palo Alto, California, declined to comment beyond the company’s Tuesday statement.

Cash Burn

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The year-end balance sheet showed Tesla had about 51 cents of cash and other highly liquid assets on hand for every dollar’s worth of expenses coming due within 12 months.

Before its first-quarter debt and equity raise last year, Musk had said Tesla didn’t need to raise any more capital then either, telling analysts at the time the company was mulling the question of “how close to the edge do we want to go?”

Related: Tesla Short-Interest Finance Rate Rises as Model 3 Target Missed

“It’s pretty likely they’re going to have to go to the capital markets in the not-too-distant future,” Bruce Clark, a credit analyst at Moody’s Investors Service, said in an interview Monday ahead of the first-quarter output results. Tesla has $1.2 billion of debt maturing in the next 12 months and is expected to burn through $2 billion of cash this year. After repeatedly missing Model 3 production milestones, raising money could prove difficult, he said. “Their credibility has taken some hits.”

Expensive Capital?

Musk has proven adept at raising money before, but it’s likely to be more expensive the next time. The unsecured bonds Tesla sold just months ago are trading near record lows, and a similar sale is less likely because investors probably would demand a yield of at least 10 percent. That’s almost double the 5.3 percent Tesla had to offer last time.

Alternatives include debt that can be converted to stock, which Tesla has issued several times before. The equity’s volatility -- and thus its potential for gains -- could make this option worth more to a buyer, so the coupon wouldn’t have to be as high, according to debt investors who are studying Tesla’s financial situation. Tesla also has capacity to issue secured debt, which typically carries lower interest rates than unsecured bonds.

Another source of cash could include $438 million of unused funds from a revolving credit facility listed in its year-end annual report. The actual amount available could be curbed if Tesla falls short on minimum levels for liquidity and expense coverage set by its lenders, but the company said it met all the standards for its loans as of Dec. 31.

Philippe Houchois, an analyst at Jefferies Group LLC who upgraded the shares to hold from underperform on Monday, sees Tesla skewing the mix of funds more toward equity than debt in its next capital raise. In an interview on Bloomberg Radio, Houchois said he expects Tesla will need $2.5 billion to $3 billion to fund the ramp-up of Model 3 production, with shareholders suffering some dilution as a result.

“Raising capital in those circumstances with what’s happening on the bond side isn’t easy,” Houchois said Monday.

Read more: Musk’s April Fools’ Joke Falls Flat as Production Fears Abound

Not that an equity raise, or convertible debt offering, would be easy either. Tesla’s stock is fresh off one of its worst months ever. Some of Tesla’s convertible bonds are now trading below par, a sign that investors are valuing the securities less like equity, said Peter Tchir, head of macro strategy for Academy Securities Inc. The scrutiny from fixed-income investors could blunt Musk’s persuasive powers that helped sell the last bond issue.

“Credit is not a game,” Tchir said on Bloomberg Television Monday. “This is going to be who comes and takes you to task for your mistakes.”

Moody’s now rates Tesla B3, five steps above default, with a negative outlook. But that’s still far from a default warning. Wall Street has pretty much disregarded Musk’s joking April Fools’ tweet over the weekend that the company “has gone completely and totally bankrupt.”

“If we thought bankruptcy were imminent, the rating would be lower,” Moody’s Clark said.

— With assistance by Craig Trudell, Sally Bakewell, and Taka Endo

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