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Tesla’s Stock Offering: Not Their First Nor Their Last

Tesla’s $5 billion dollar stock offering earlier this month marks a significant milestone in the company’s capital raising journey. Since its IPO in June of 2010, Tesla’s stock price has gone from $17 per share, for a market capitalization of about $1.7 billion, to its current price of $449 per share (after a 5-for-1 stock split), and a market capitalization of $419 billion. By any measure, Tesla’s ascendence is remarkable.

Still, it’s reasonable to ask why Tesla is coming to the market yet again with a stock offering. After all, Tesla has been periodically issuing shares ever since it became a public company. For instance, in May of 2016, Tesla issued 6.8 million new shares and raised $1.46 billion in what at the time was its largest offering. And that amount was surpassed on February of this year, when Tesla went to the market again and raised another $2.31 billion.

So why now? The answer is simple – Tesla needs money. 

Tesla has always needed money and liquidity to boost its investment in its plants, and in particular its famous Gigafactories. And as it continues with the mass production of the Model 3 and future introduction of new models, its needs are probably greater than ever. In 2010 Tesla had about $114 million in property, plant and equipment; by the end of 2019, that amount grew to $10.4 billion. 

All this massive investment was funded mostly through debt: Tesla’s long-term debt grew from a meager amount of 71.8 million in 2010 to $11.6 billion in debt and finance leases, according to Tesla’s most recent annual report.

Specifically, Tesla used mostly convertible debt, or bonds that could be later converted into common stock if the stock price appreciates enough. It issued $600 million dollars of convertible bonds in 2013, $2 billion dollars’ worth in 2014, $850 million worth in 2017, and an additional $1.6 billion worth in 2019.

What is behind Tesla’s obsession with convertible debt? Well, it turns out that Tesla is almost the poster child of convertible bonds issuers. The typical convertible issuer is a non-investment grade, high growth company that isn’t a traditional straight debt issuer. And Tesla falls precisely into the category of a speculative grade technology company. When Tesla issued its first convertible bond back in 2013 it was not even rated by one of the major credit rating agencies. And while S&P recently upgraded Tesla’s rating from a B- to a B+, Tesla is still a risky company with a rating that is significantly below  the threshold for investment grade. 

By issuing convertible bonds Tesla was able to get away with offering its investors a very low coupon—that is, the annual interest rate paid until the bond reaches maturity. For example, its 7-year convertible bond issued in February 2014 offered investors a coupon of 1.25%, while its 5-year convertible offering in 2014 was able to attract investors with a coupon as low as 0.25%! 

Of course, investors were not simply “star-struck” by Tesla when they agreed to those ultra-low coupon rates. They were rather attracted to the possibility that they could convert the bonds into stocks if Tesla’s stock price appreciated enough.  Unfortunately, for the holders of the convertible bond that was issued with a coupon of 0.25% – they saw their bonds mature when Tesla’s stock price fell way below the conversion price of $359.87. This was good news to Tesla, which was able to raise capital at only 0.25% with no need to dilute its equity! But soon things will be different. Tesla’s stock price has appreciated so much that it is likely that those bonds maturing in 2021 will be converted to stocks.

So Tesla might be now at an inflection point. As its stock price continue to rise, it may be difficult for Tesla to keep offering convertible bonds. If its profitability continues to improve, as well as its credit rating, we might see Tesla resorting more to offering of plain-vanilla, non-convertible bonds.  

One thing seems to be certain, though: whether it sells bonds or stocks, Tesla will be back for more money. In a world in which investment has declined over the last twenty years, Tesla is one firm that keeps investing.

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