Tesla raises goal in hunt for capital

Tesla is increasing the amount of money it will attempt to raise to as much as US$2.7 billion.

The Palo Alto, California, electric car and solar panel maker said on Friday that it’s raising the offer due to the positive response from Thursday’s announcement that it was hunting US$2.3 billion.

Also, CEO Elon Musk more than doubled the amount of stock he would buy from US$10 million, to US$25 million.

The offer was detailed in a filing on Friday with the US Securities and Exchange Commission. It includes up to US$1.84 billion in notes that pay 2 per cent annual interest and convert to Tesla common stock in 2024. Also included are more than 3.5 million new shares worth as much as US$866 million.

The new numbers include underwriting brokers exercising their full options to buy additional notes and shares.

Last week, Tesla reported that its cash balance at the end of the first quarter shrunk by US$1.5 billion since December to US$2.2 billion. Musk said during a conference call that Tesla might need to raise capital again.

The latest cash and stock offerings would raise the company’s debt from US$9.79 billion to as high as US$11.63 billion, according to Tesla’s filing.

The company will use the proceeds to “further strengthen our balance sheet as well as for general corporate purposes,” the filing says.

Tesla’s shares would have to reach US$309.83 by May 15, 2024 for the notes to be converted to stock. That’s a 25 per cent increase over the current price. If they don’t hit that price, Tesla is on the hook to repay the notes largely in cash, according to the filings.

In a statement on the offering on Thursday, Moody’s Senior Vice-President Bruce Clark wrote that the offering will give Tesla enough liquidity to pay US$566 million in notes that mature in November, plus provide cash to expand distribution of Tesla’s Model 3 in Europe and cover any spending needed from softening demand for all three of Tesla’s models in the US.

Still, Moody’s kept a negative outlook and B3 rating on Tesla’s debt. That is six notches below investment grade.

In a March 30 note, the ratings agency wrote that the Model 3, Tesla’s lowest-price model, currently sells for an average of US$55,000. To increase sales, the price has to drop towards US$42,000, and to make enough money to pay the bills, Tesla has targeted a 25 per cent gross profit margin on the Model 3, Moody’s said. Currently, gross profits on a US$42,000 Model 3 are “materially” below 25 per cent, according to Moody’s.

“In order to achieve this margin target, the company will have to undertake significant reductions in fixed and variable costs associated with the vehicle,” Moody’s wrote. “We expect that it will be a major challenge for Tesla to aggressively increase production/deliveries, shift the product mix toward the US$42,000 price level, and simultaneously lower costs enough to achieve the 25 per cent gross margin target.”

– AP