Tesla needs money if it wants to meet its ambitious Model 3 production targets. On Monday, the automaker announced plans to offer $1.5 billion in senior notes, with plans to use the money to fund a rapid expansion of the company’s operations.
The $35,000 car poses something of a problem. Tesla currently makes fewer than 10,000 cars per month on average, but nearly half a million buyers have placed a deposit for the company’s cheapest ever car. To meet demand, Tesla is expanding its Gigafactory in the Nevada desert and planning three more Gigafactory facilities further, to be announced in further detail later this year. The upfront money to fund these plans has to come from somewhere.
A “senior note” is a form of bond that takes priority if the company ever goes into bankruptcy. Essentially, Tesla is borrowing money from investors and agreeing to pay them the money back plus interest. The interest rate has not been set yet.
The value of the bond is also determined by how much others are willing to pay for it, as investors can sell their bond before the end of the agreed payment period. The total return on a bond, factoring in market value and interest rate, is called the yield.
After the announcement, credit ratings agency Standard & Poor assigned the issue a “B-“ rating. Anything lower than “BB” is classed as a “junk bond” — these types of bonds are risky bets, as it means the company is more likely to miss payment, but they could offer higher yields in the long run. This is the first time Tesla has offered a junk bond, and the risk of rapid Model 3 expansion is reflected in analyst commentary.
“We could lower our ratings on Tesla if execution issues related to the Model 3 launch later this year or the ongoing expansion of its Models S and X production lead to significant cost overruns,” Standard & Poor said in a statement.
Tesla needs to prove that its ambitious expansion plans are realistic. While the long range Model 3 with premium features has already started shipping, the base $35,000 isn’t due until later this year. Any delays along the way could shake investor confidence and encourage them to look elsewhere.