Tesla is making a risky move by issuing $1.5 billion in debt
•Tesla will issue $1.5 billion in unsecured notes.
•Issuing new debt deviates from previous equity based capital raises.
•The carmaker has added substantial debt to its balance sheet since its SolarCity merger last year.
Tesla announced on Monday that it will raise $1.5 billion in additional capital, but the carmaker is doing so in a way that's different from previous funding rounds: it's issuing debt.
When Tesla has raised money over the past two years, it's sold more stock. And with the company seeing a massive uptick in its share price over the first half of 2017, much discussion swirled around whether CEO Elon Musk and his management team would head back to the public markets for more.
The stock is now up 65% year to date, so at one level selling more stock makes sense, but at another level, that would test the patience of existing investors, who would see their stakes further diluted.
On Tesla's second-quarter earnings call with analysts, Musk telegraphed his intent:
You can question the wisdom of this, but the decision has been made. Here's the release from the company:
Tesla intends to use the net proceeds from this offering to further strengthen its balance sheet during this period of rapid scaling with the launch of Model 3, and for general corporate purposes.
Tesla's projected cash burn for the second half of 2017 would be about $2 billion, leaving it with what the company considers a comfortable $1 billion in reserve on the balance sheet.
But the bond sale suggests that Tesla doesn't want to start 2018 by cutting into that reserve. The critical issue for investors to consider here is the impact that adding another $1.5 billion will have on Tesla's already increased debt levels, following its acquisition of SolarCity in late 2016.
The carmaker will now have tacked on an extra $4.5 billion in liabilities in less than 12 months.