A Tesla junk bonds sale is hoped to keep Tesla’s balance sheet in good shape. Tesla is running out of cash and hopes to raise some liquidity by selling these bonds. So what are ‘junk bonds’?
Companies issue bonds to investors on the basis that these companies can pay the investor the value of the bond when it matures plus interest. Some bonds are issued by firms that have a questionable credit rating, and may not be able to repay the value of the bond. These are known as’ junk bonds’ with no guarantee of return – but they come with high-interest rates.
Junk bonds are generally highly speculative, but can sometimes appear to offer a lower risk if they are sold by reputable companies – such as Tesla. Such bonds are typically offered by companies needing quick capital needed to finance a significant new development or even a takeover.
Tesla is one of the former; it is looking for quick cash to help finance the production of the Model 3. Now, this does not mean that Tesla is short of money. It means that it wants to maintain a steady balance sheet while it increases production of the Model 3.
Tesla wants to meet its target of 5,000 cars a week by the end of 2017 without compromising the balance sheet. Elon Musk expects to raise almost $1.8 billion (£1.4 billion) from this ‘junk bond’ sale. The sale is not public but open only to private investors.
Tesla is currently estimated to be spending a weekly sum of around $100 million in order to achieve the 5,000 cars a week target. Over a week ago, the firm stated that it was seeking $1.5 billion through the Tesla junk bond sale. However, by Friday the company expected this to increase to $1.77 billion.
Why is Tesla doing this? In fact, without this extra cash, the liquidity of the company would be challenged and the Telsa Model 3 production target may become impossible to meet. This is an indication of how even well-known companies can be financially challenged when faced with the need to develop and manufacture a specific target of new hi-tech vehicles.
Tesla’s target will be challenging, given the current relatively low demand for electric vehicles. Hence the need for the Tesla junk bonds sale.