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Abu Dhabi, UAEThursday 20 September 2018

Tesla's crown jewels may be an option to raise cash

Debt-laden electric car maker would be wise to act sooner rather than later, analysts say

The Tesla Gigafactory, Nevada. Firm could look to use such assets to raise cash. Reuters
The Tesla Gigafactory, Nevada. Firm could look to use such assets to raise cash. Reuters

Now that Elon Musk’s quixotic bid to take Tesla private is dead, the hand-wringing over when he’ll raise fresh financing has begun anew.

Mr Musk may insist that he doesn’t need to raise more capital this year but to many on Wall Street, that sounds improbable. And even if it were true, they argue, it’s always best to lock in financing while you can. Who knows what markets will look like - and, moreover, how they will view Tesla - a year or two from now.

But how to best tap markets?

With demand for the electric-car maker’s bonds flagging, some have started pointing to the model that Ford deployed during the depths of its financial distress more than a decade ago. The centrepiece to this approach: putting up assets, including the iconic blue Ford oval logo, as collateral for cheap lines of credit. The Ford insignia was valued at $8 billion back then. Interbrand estimates that, given the passion that Tesla drivers have for their cars, the T emblem may already be worth half that just 15 years into its existence.

“Pledge those assets and have that in your back pocket,” said Hitin Anand, an analyst at CreditSights. “It’s prudent to build liquidity.”

Tesla has no shortage of collateral it could use to back borrowings, analysts say, and would probably consider other assets before it considers mortgaging its brand or forms of intellectual property. Crown jewels include its manufacturing plant in Fremont, California, and its mammoth Nevada battery factory. But piling on a new layer of debt risks alienating the company’s existing bondholders, who would be pushed further down in the pecking order for repayment if the company defaults.

Bloomberg Intelligence analyst Joel Levington estimates that $3bn of new secured debt may cause S&P Global Ratings to downgrade the junk bonds to the CCC range, following a cut by Moody’s Investors Service made earlier this year.

A representative for Tesla declined to comment.

Ford’s 2006 move to pledge its logo and other assets was something of a last resort as the then cash-strapped company faced record losses. The company ultimately secured almost everything it owned - including inventory, factories, brands and a stake in its auto-finance business - in exchange for a loan package of more than $23bn.

The deal ultimately helped the company weather the financial crisis, and it was the only one of the Detroit Three car makers to avoid filing for bankruptcy. The last of the collateral Ford pledged was released in 2012 when a portion of the company’s debt returned to investment-grade ratings.

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Tesla’s situation isn’t as dire, according to Mr Levington. Still, it would be wise for the car maker to raise money now, he said. An extra capital infusion would help quell investor concerns about the company’s cash balances, and give it additional runway at a time when car sales are falling.

“Getting liquidity now makes a lot of sense," Mr Levington said. “In a backdrop that’s starting to get a little bit weaker - maybe on its way to being a lot weaker - ."

Even if the company does hit its production goals, it still has to contend with more than $1.2bn of convertible bonds due in November and March. As things stand, the company will have to repay those obligations because its stock is trading below the price at which the bonds can convert into equity. With about $1.3bn of cash on hand, Tesla will likely need to refinance the debt, analysts say.

The company also has ambitious - and potentially expensive - plans for the future, including new factories in Europe and China and plans for a semi truck and a new 4x4 vehicle.

For now, Tesla has plenty of options. In addition to potentially securing debt, the company could likely issue more convertible bonds, according to Mr Anand. While the company’s junk bonds have slumped, its convertible notes still trade near or above par.

Even the unsecured junk-bond market is likely still open to Tesla, though the company probably would have to pony up more than the 5.3 per cent it paid to issue $1.8bn of bonds last year. The notes now trade at about 87 cents on the dollar to yield 7.7 per cent, but companies including JC Penney and BMC Software have successfully sold bonds with CCC range ratings this year.

“The high-yield market has financed some really dicey stuff,” said Vicki Bryan, founder of Bond Angle, an independent research firm. “There’s more value in Tesla’s existing assets and their promise.”

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