How so? Junk bonds.
Let’s face it, the Tesla Model 3 is the “it” car at the moment, and Tesla is fully aware of this fact. As it works overtime to fill thousands of pre-sale orders, Tesla is already laying the groundwork for additional Model 3 production. Reuters has learned that Tesla is preparing to raise some $1.5 billion through its first-ever offering of junk bonds. What are junk bonds? They’re corporate bonds that are high-risk and high-return. Typically, a company that issues them is not the most fiscally sound.
Although Tesla’s market value is currently about $60 billion, it’s still losing a lot of money. Last April, it was estimated Tesla loses $13,000 on every car it sells. But this is the first time Tesla is offering junk bonds. How come? It needs cash, and it needs it quickly. Model 3 demand is only going to increase and, therefore, production needs to ramp up. In offering junk bonds, Tesla CEO Elon Musk is betting that bond investors will be eager to back his company’s goals. One bond expert told Reuters that "Bond investors, who typically don’t love companies that don’t make money, will be far more forgiving when it comes to Tesla."
Up until now, Tesla has been keeping the lights on through equity offerings and convertible bonds, which will one day convert into shares. For example, last March Tesla raised some $1.4 billion through a convertible debt offering. So, is issuing junk bonds a risky move for Tesla? Absolutely, and the Model 3 must become profitable. There’s simply no way around that this time. Clearly this isn't the way a typical automaker runs things, but Tesla and its founder/CEO are anything but typical.