TSLA, the electric car company whose stock has risen over 12x since its IPO in late 2012, has just announced a $1.6 billion convertible bond offering. Proceeds will be use to build the company’s “gigafactory” plant. The deal could be being priced as I’m writing this.
The offering will be divided into two tranches, half of the bonds repayable in 2019, the other half in 2021. Proposed interest rates will be negligible–around those of comparable Treasury securities. The conversion premium for each will likely be about 40%, meaning the owners will only make money by converting into TSLA common if the stock price rises above $350 a share.
–the deal could be transformative for TSLA, giving the company a large cash infusion at an earlier than expected date
–who would buy a bond like this rather than the stock? After all, a convertible is just that–a deferred issue of stock. It’s like buying TSLA at $350 today in return for the promise of a 1% dividend for each of the next few years. For an equity investor, this sounds crazy. But there are two groups of potential eager buyers.
—-bond fund managers, who are desperate for anything that can provide a little zip to their returns. Even a deal like this one is better than buying a straight bond. Putting the stock issue in a bond wrapper allows bond managers to buy it without violating their mandate to invest only in fixed income.
—-convertible funds. They, too, have a mandate. They can only invest in convertibles. If they don’t participate and the Tesla bonds rise sharply, they may fall behind in the performance race to their rivals who do. And there aren’t that many new issues in any given year. So there’s considerable pressure on these managers to take part in every convertible offering,
In any event, this is good news for current TSLA holders. (Note: I bought the stock at $120 and sold it at $175. If I still held it, I’d be selling now.)