From an investment advisory I get:
Tesla a prime example of the insanity that's sweeping the credit markets today.
On August 3, we noted that electric-car maker Tesla (TSLA) was burning through cash at an unprecedented rate. Despite promises to the contrary, we said it was only a matter of time before CEO Elon Musk would be forced to raise more capital.
You can fake earnings, but you can't fake cash flows. And Tesla is now hemorrhaging cash like never before...
Tesla sent more than $1 billion to "money heaven" in just three months... which means it has already burned through most of the money it raised from investors back in March.
The company now has just $3 billion in cash on hand, out of a mind-boggling $10 billion it has siphoned from investors since 2012. And yet it's expected to burn through at least another $2 billion before the end of the year. At this rate, Tesla could run out of money as early as the first quarter of next year.
Don't be surprised to see Musk going "hat in hand" to investors again soon.
So we weren't surprised when just a few days later, Musk said the firm was planning to raise another $1.5 billion from investors. But we were shocked he intended to issue bonds, rather than equity and convertible debt, as he has in the past. And we were downright appalled by the terms...
The eight-year bonds – rated deep in "junk" territory by both major credit-rating agencies – were priced at just 5.3%. This is the lowest yield among similarly rated "high yield" bonds in history.
But "investors" weren't fazed. In fact, they begged for more... Musk was ultimately able to raise $1.8 billion, $300 million more than originally planned.
Longtime readers know we've questioned why anyone would willingly buy stock in a capital inefficient company with a failed business model and no hope of ever turning a profit. But at least Tesla shareholders stand to benefit from the company's potential success (however unlikely that is).
That's not the case here...
Remember, bonds are fundamentally different than stocks. Bonds can't "do OK." They're binary. They either pay back interest and principal or they default.
That's not a minor concern for a company that has never earned a profit and could run out of money within a year.
In other words, the folks who bought these bonds are also likely to suffer massive losses if Musk's grand vision falls short. But unlike Tesla shareholders, they won't earn anything more if he somehow pulls it off. And they're being paid just 5.3% a year for the pleasure.
As Martin Fridson – the "dean" of corporate debt, and the world's foremost expert on the high-yield credit markets – noted to Bloomberg following the deal...
"It's a great deal for [Tesla], which by definition means it can't be a great deal for the investors."
The reason they're getting a good deal is because yields are near record lows and risk premiums are much less than they should be. Tesla is taking advantage of that.
We wish those folks the best of luck. They're going to need it.