Tesla Announces $1.6 Billion Convertible Notes Offering

http://www.teslamotors.com/about/press/releases/tesla-announces-16-billion-convertible-notes-offering

by revelation • 12 years ago

190 88 12 years ago

teslamotors.com

crabasa• 12 years ago

TSLA up 2% on the news:

https://www.google.com/finance?cid=12607212

aroch• 12 years ago

So, bet's that the recent Apple/Tesla meetings were about Apple joining this?

zinssmeister• 12 years ago

those meetings with Apple weren't really "recent". But yeah Apple has a high interest in batteries as well of course.

digikata2• 12 years ago

Is there a reason for Tesla to raise funds via Convertible Notes vs issuing additional stock? I know little about this area.

edit: Thanks for a range of informative replies!

revelation• 12 years ago

I think it's designed to limit dilution of existing shareholders.

marvin• 12 years ago

A suspicious mind could also suspect that it is an attempt to limit availability of additional shares on the open market, preventing existing short sellers from covering their positions en masse. Musk said something to this effect during the previous capital raise.

Tesla has a ~30% short interest, which contributes to the ridiculous volatility of the stock.

rayiner2• 12 years ago

A blue chip company will usually issue bonds because investors perceive them as low default risk and will buy debt at attractive rates. A company like Tesla would be seen as higher risk and would face higher rates on debt. A convertible note offers a potential equity element that can cause investors to accept less interest in return for potentially sharing upside though equity. The benefit to Tesla is that it won't necessarily dilute existing shareholders unless the conversion is exercised.

vagarwa• 12 years ago

targets different group of investors (who like the fixed income component) and is quicker to issue and less costly in terms of coupon rate and transaction costs. Tesla's high stock price 'begs' a convertible offering which lets the Company offer equity by the 'back door' without impacting the stock negatively.

dpcheng20033• 12 years ago

Cheap debt with enough financial engineering to minimize EPS dilution.

TSLA is an ideal stock for convert debt because it's highly volatile (compared to some other companies) which makes the pricing more attractive and opens it up for a certain class of buyers.

Source - I used to price these for a living.

foobarqux2• 12 years ago

Namely convertible arbitrage.

billyarzt2• 12 years ago

These also allow for deductions at Tesla's applicable plain vanilla debt rate, which would be much higher than the cash interest rate on the notes (by using a call spread on top of the embedded option). So there's a tax arbitrage as well.

Source: I used to structure and sell these for a living

"In connection with the offering of the notes, Tesla intends to enter into convertible note hedge transactions and warrant transactions, which are generally expected to prevent dilution up to approximately 100% over the common stock price at the time of pricing of the notes due 2019 and 120% over the common stock price at the time of pricing of the notes due 2021. Tesla intends to use a portion of the proceeds from the offering to pay the net cost of the convertible note hedge transactions. In connection with establishing their initial hedge of the convertible note hedge and warrant transactions, the hedge counterparties or their affiliates expect to enter into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the notes, including with certain investors in the notes."

foobarqux2• 12 years ago

From Wikipedia:

From the issuer's perspective, the key benefit of raising money by selling convertible bonds is a reduced cash interest payment. The advantage for companies of issuing convertible bonds is that, if the bonds are converted to stocks, companies' debt vanishes. However, in exchange for the benefit of reduced interest payments, the value of shareholder's equity is reduced due to the stock dilution expected when bondholders convert their bonds into new shares.

cloudwizard• 12 years ago

This means that the law banning Tesla sales in Texas will be off the books in about 20 seconds.

deletes4• 12 years ago

Could you elaborate on that; why would politicians care?

Phlarp• 12 years ago

Jobs. This factory has the potential to bring a large number of jobs to whichever state it ends up getting built in.

tdiggity• 12 years ago

If Texas is the right place for it, then so be it. But, it would be a great way to stick it to them by not choosing them because of their stance on traditional dealers vs. Tesla.

riggins2• 12 years ago

it would be sweet if Telsa uses this as leverage to roll back the dealership law.

prostoalex• 12 years ago

I'm curious whether retail presence matters that much - their current clientele seems to be motivated enough that even if they sold exclusively via Web site, with subsequent delivery in person, they would still have a waiting line.

Those pesky laws generally prohibit direct sales, not service of the vehicles, so Tesla would still be able to open a full-blown service location, and direct any potential new buyers online.

hnnewguy• 12 years ago

their current clientele seems to be motivated enough

Their current clientele is a small population of wealthy trend-setters and early adopters. It's unlikely Tesla will ever sell 500,000 units per year over the internet, without a retail location.

But changing arbitrary laws is small issue.

cs7022• 12 years ago

Wow, they expect to be selling half a million vehicles/year in six years. That would make make a Tesla a major automaker, roughly in the same league as household-name auto brands -- you know, the ones that advertise in the Super Bowl.

mikeyouse7• 12 years ago

    Wow, they expect to be selling half a million 
    vehicles/year in six years.

No no no, they expect to sell batteries to power half a million vehicles per year.. They intend to supply other auto companies with battery packs.

    That would make make a Tesla a major automaker,
    roughly in the same league as household-name auto brands.

It would still be a magnitude smaller than all 'major' manufacturers. Toyota sells ~10M/year, GM ~9.5M/year, VW ~9.2M/year, Ford ~5.5M/year, Chrysler ~2.4M/year, BMW ~2M/year..

There's no shame in being a wildly profitable smaller manufacturer though.

basicallydan• 12 years ago

The Gigafactory PDF does make it sound like it'll be 500,000 vehicles per year, though. Perhaps it's left vague because "500,000 batteries" just doesn't sound like a lot of batteries to most people.

cs7022• 12 years ago

Ah, that would make more sense.

That said, half a million vehicles would make them 1/4th the size of BMW and 1/5th the size of Chrysler. For me, that's "roughly in the same league as household-name auto brands."

(For reference, right now, they are around 1/100th the size of BMW and Chrysler.)

cwal37• 12 years ago

A few hundred thousand vehicles does put them at Subaru's level in America though.

http://www.subaru.com/company/news/

Aloisius• 12 years ago

The Gigafactory pdf indeed says 500,000 Tesla vehicles on page 3:

  2020 Tesla Vehicle Volume ≈ 500,000/yr

whistlerbrk• 12 years ago

Very interesting, I did not know selling the batteries was part of the plan. Are the trying to remain independent though or would they be a very large acquisition target long term then? I suppose they could license out large format battery tech to a number of other industries as well?

Geee• 12 years ago

I don't think that's just Tesla vehicles, they'll probably supply them for others too? Anyway, Tesla's goal from the beginning has been to eventually take the market leader position by being the first-mover in the electric car disruption.

loceng2• 12 years ago

It's very possible. Their factory has the capability to produce 500,000 vehicles per year - that's one vehicle every minute.

dbg31415• 12 years ago

Fuck, I read all that and still no news of a Tesla Convertible. Bring back the Roaster! Any executive that opts to discontinue a 2-seater needs to be shot.

josh-wrale2• 12 years ago

I wouldn't be surprised if the reason for a current lack of a convertible is a strategic move away from the following things:

1) making the cars even more expensive (by making) 2) things that have to high potential for fatality 3) things that require lots of engineering, testing and certification for a limited appeal/run (and thus limited profit)

It will be awhile on that convertible, I bet.

The Model X has gullwing(-like) doors.. That's pretty cool, right?

grecy• 12 years ago

The Model X has gullwing(-like) doors.. That's pretty cool, right?

http://i52.photobucket.com/albums/g24/speed_addict/Lambo-Doo...

firebones• 12 years ago

> Bring back the Roaster!

I hope this isn't referring to the endless debates around whether the reports of Tesla fires is, or is not, on the wrong side of a Poisson distribution of such events... ;)

jacquesc• 12 years ago

Just curious, how does this differ with 'junk bonds'?

riggins2• 12 years ago

'junk bonds' are bonds with a high interest rate because of poor credit quality.

convertible bonds basically have an equity option attached, so the interest rate paid by the issue is lower than what it would be otherwise (because the buyer is getting an option).

Often it is low grade companies that issue convertible bonds (to keep the interest expense they pay down), but it doesn't have to be. Investment grade companies can issue converts as well.

jake_nd• 12 years ago

Vertically integrating seems logical. Next step, lithium mines?

And will they build the same 18650 packs, or develop something new?

paulftw4• 12 years ago

Usually, when you start investing in manufacturing, that means R&D has achieved all it could.

So is this factory a sign that Tesla is settling down on the current levels of cell capacity, charging times, weight, etc?

I.e. they don't believe in a breakthrough before 2020, do they?

wtvanhest2• 12 years ago

I've never heard that view before. Do you know of some examples that fit that model?

The one I can think of that doesn't fit is Intel. They continue to innovate while investing in manufacturing.

paulftw4• 12 years ago

It's not the fact they invest in manufacturing, it's the size of the investment compared to company size/assets.

Factory is supposed to pay for itself before its product becomes deprecated. Looking at how expensive this gigafactory is - how many years will it take before profits from selling li-ion batteries cover the equipment & construction costs?

Some projections say peak output is expected by 2019-2021. Doesn't this imply that today's technology will still be competitive and in demand 6-7 years from now?

I'm assuming gigafactory uses chemicals and tech that powers current generation of Tesla cars. Because if they had something significantly better they would not care about 2019, but would instead die to get it to market ASAP. Not caring about unit price or volumes. Just to prove that it works and to capture the high end market.

And my second assumption is they don't plan to lose money on this project.

loceng2• 12 years ago

They're profitable and successfully competing with existing market. So why not?

paulftw4• 12 years ago

I'm not saying this is wrong or right. I'm asking whether we should stop dreaming about quick charging cars that can travel 1000 miles.

hrvbr• 12 years ago

Oh, the Tesla website is available in French now and they're building stores all over Europe.

chiph• 12 years ago

A half-million batteries a year means they need raw materials to support that production. Are there suppliers that can do that? After all, these are car-sized batteries, not phone-sized ones.

kirk21• 12 years ago

Buying more panasonic stock as we speak. They are one of their main partners and the stock is still damn cheap.

Tesla Announces $1.6 Billion Convertible Notes Offering

Related Stories