Money To Burn: What To Make Of Tesla's Latest Bond Offering

Tesla Inc TSLA has upped its recent bond offering to $1.8 billion to help fund the new Model 3 and other necessities. Initially, Tesla planned to raise $1.5 billion.

Gene Munster of Loup Ventures made sure to note that Tesla was not raising capital to fund the Model 3, but instead is using it as an ‘insurance policy’ if the company encounters any unforeseen issues with production.

“It’s important to understand that Tesla does not need the $1.8 billion in debt to ramp Model 3 production. The company can fund the nearly $2 billion manufacturing investment out of its $3 billion cash balance. But Tesla is raising money because it’s critical it has an insurance policy if the Model 3 ramp hits any unexpected issues," said Munster. 

Related Link: Morgan Stanley's Adam Jonas Raises 'Bull Case' Tesla Price Target To $526

According to Oppenheimer analysts, the bonds issuance is a “watershed moment” for two primary reason:

• 1. Pricing at 5.25 percent, the company is being viewed as having nearly investment-grade credit despite posting consistent operational losses.
  2. Large CAPEX obligations, and continuing to be in high-growth mode.

The latest issuance is assuring analysts that the bond market is anticipating Tesla to successful execute on its guidance.

“We believe TSLA has the potential to demonstrate significant operational leverage, but significant execution risk remains, and the potential for management to expand the scope of the enterprise is likely given past decisions,” Oppenheimer analyst in a recent analyst note.

The inexpensive pool of capital that Tesla is tapping into is expected to provide the company significant financial flexibility and it continues to produce more units of its least expensive model yet.

“Given our expectation that TSLA will spend nearly all of this capital in 3Q17, we believe such access could prove essential should it encounter difficulty ramping Model 3 production,” the Oppenheimer note said. 

Tesla plans to invest roughly $3.5 billion in CAPEX, nearly tripling last years numbers according to a new report from Statista. Tesla held $3 billion in cash and equivalents at the end of June 2017.

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Image Credit: By Steve Jurvetson [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons