On Thursday, electric car company Tesla Inc. (TSLA) sold $546 million of bonds backed by lease payments on its Model X and Model S vehicles. The sale is part of Tesla's larger initiative to raise money in various ways in efforts to ramp up production of its first mass-market vehicle, the Model 3 sedan. Likewise, it signals a growing interest in yield-focused investors for corporate debt of all types. (See also: Wozniak Turns Tesla Critic—Doesn't Trust Elon Musk.)
The underlying asset in the over-half-billion-dollar debt issuance is the demand for Tesla leasing, as bondholders are set to be paid back through money collected from lease payments, as well as the resale value of the cars once the leases are up.
Driving Toward Lower Interest Rates
Last year, Palo Alto, Calif.-based Tesla sold traditional corporate bonds for the first time. Now it is making its debut in the asset-backed-securities (ABS) market roughly six months later. This time around, the automaker is once again faced with eager bond buyers, allowing the company to cut its interest rates on the multipart deal down from levels initially floated to investors.
Tesla's debt buyers are banking on the continued strength of the auto leasing business, which has seen a strong pickup in securitization over the past years. For some investors, fearing Tesla's current woes such as its consecutive production shortfalls and billions in cash burn, buying its debt insulates a good deal of risk. At the same time, as the historically strong U.S. economy breeds consumer and Street optimism and rates remain low, investors are incentivized to nudge into all corners of the bond market. However, analysts note that if the cars can't be resold for as much as expected, investors could end up taking some losses, particularly if the market's over-nine-year bull run sees its time run out. (See also: Tesla: ‘Now’s the Time’ to Buy, Says Evercore.)