Last year, Elon Musk insisted that Tesla can achieve lasting profitability without obtaining extra money from investors. But the company is now admitted that it was wrong filed papers to raise another $ 2 billion by selling a mix of debt and equity.
Tesla seeks to raise money only a few days after reporting an unexpectedly large loss in the first quarter of 201
The lower cash balance reflected primarily one-off events and paid a $ 920 million loan and a bunch of cars in transit to customers at the end of the quarter. Nevertheless, having only $ 2.2 billion in the bank is an uncertain situation for a company that has been known to lose more than $ 700 million in one quarter.
Having enough $ 2 billion in the bank would give Tesla a cramped respite. And the company has many uses for extra money, with several new cars including model Y SUV, Tesla Semi, and the new Tesla Roadster slated to start production by the end of 2020.
Shareholders generally do not like to watch companies dilute the value of their shares by issuing new shares, but the markets have responded positively to Tesla's announcement. The company's share price is up three percent over Wednesday's closing price.
Lenders may be cautious about Tesla's large debt burden
Tesla's goal is to sell shares worth $ 642 million in Tesla's current share price. Tesla will also offer $ 1.35 billion in convertible senior notes debt that allows the lender to take the Tesla share (at a fixed price) instead of cash when the loan matures.
Practically, this means that Tesla must repay the loan in May 2024 if Tesla's share price is poorly executed over the next five years. If the shares work well, lenders will choose to take the shares instead. This stock conversion option sets the pace for lenders, and helps Tesla get a lower interest rate than the company could get with a more conventional loan. Tesla has issued convertible notes several times before.
Tesla paid $ 920 million in March and is due to pay off about $ 2 billion in loans over the next couple of years, so the last debt problem does not necessarily mean that the company's total debt burden will be on an upward path.
Previously, Tesla has portrayed itself as a rapidly growing startup that had to borrow heavily to finance rapid growth. But it is only sensible to invest in growth if it is going to lead to healthy profits. Model 3 helped Tesla deliver two strong quarters with a profit in the second half of 2018, but then it went back in the red quarter. In recent earnings calls, executives said they had not expected to return to profitability in the third quarter.
Bond markets have reflected growing concerns about Tesla's prospects in recent months. The value of previously issued Tesla bonds doubled earlier this month when the company announced its weaker than expected first-quarter car dealings. Therefore, Tesla may have to offer a higher interest rate than before to entice investors to take a risk on a company whose long-term viability is far from certain.