Tesla could use Ford’s model to raise more cash
Now that Elon Musk’s quixotic bid to take Tesla Inc. private is dead, the hand-wringing over when he’ll raise fresh financing has begun anew.
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 Motor Co. deployed during the depths of its financial distress more than a decade ago. The centerpiece 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 $3 billion 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 Tesla spokesman referred Bloomberg to previous management comments on plans to grow cash and pay down debt without new capital.
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 $23 billion.
The deal ultimately helped the company weather the financial crisis, and it was the only one of the Detroit Three automakers 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.
Tesla’s situation isn’t as dire, according to Levington. Still, it makes sense for the carmaker 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 auto sales are falling.
“Getting liquidity now makes a lot of sense," Levington said. “In a backdrop that’s starting to get a little bit weaker – maybe on its way to being a lot weaker – not being prepared puts them in a riskier position."
Even if the company does hit its production goals, it still has to contend with more than $1.2 billion 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 $2.2 billion 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 crossover vehicle.
For now, Tesla has plenty of options. In addition to potentially securing debt, the company could likely issue more convertible bonds, according to CreditSights’s 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 percent it paid to issue $1.8 billion of bonds last year. The notes now trade at about 87 cents on the dollar to yield 7.7 percent, but companies including J.C. Penney Co. and BMC Software Inc. 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.”