Tesla About to Call It's 5.3% Bonds
Tesla About to Call It's 5.3% Bonds
Remember when I warned that Tesla should call its bonds soon, and below market price? Yeah, that's happening. Tesla is advising bondholders its calling the bonds in August.
Tesla (TSLA) bondholders are being notified that the company is calling its bonds in August at the below market price of 102.65.
Don’t say I didn’t warn you.
(See my full discussion in Tesla Goes To Record Extremes To Create Q1 "Profit" on 4/28/21).
Heard It Through The Grapevine
A Tesla bondholder reported last week on Seeking Alpha that the company said it will be calling its bonds in August at 102.65, well below where the bonds have been trading for months—which is why they also were trading at negative yield-to-worst.
It makes perfect sense for Telsa to do this, even though investors only recently woke up to reality.
As I warned in April in Tesla Goes To Record Extremes To Create Q1 "Profit" on 4/28/21):
Meanwhile, Tesla should refinance its bonds
Tesla has never been keen to actually pay off debt, or even pay its bills on time. And I have projected that this year could prove to be its most challenging yet as it struggles with pricing pressure and increasingly strained demand versus rising costs (see attached forecast). Its waning edge over serious competitors, helped for now by their comparatively greater disruption from industry-wide chip shortages, will likely fade in the second half as conditions improve.
It makes sense, then, for Tesla to refinance its $1.8 billion outstanding in 5.3% senior notes due in 2025 while it’s still a market darling and interest rates are profoundly low.
The bonds are callable now at 103.98, which drops to 102.65 in August. If second quarter results prove similar to the first quarter, as I have projected, Tesla probably has a favorable window into the summer to refinance them before turning in an even more disappointing second half which could diminish market sentiment and increase financing costs.
If it doesn’t wait too long, Tesla can push out maturity another 10 years and still likely net an appallingly low coupon like 4% or better, which would reflect the market’s persistent understatement of Tesla’s much higher credit quality risk on weaker core profitability and credit metrics versus reported. In the meantime, the existing notes trade near the call price at 103.8 which indicates 1.5% ytw, 150 bps spread.
One thing Tesla does really well is exploit favorable markets. That said, the new bonds at such low yields would still be a terrible value that bondholders should avoid.
Interestingly, Tesla has not released a public statement about calling its bonds even though this clearly seems like material information. Perhaps we’ll hear about it when it releases second quarter results after the market closes tomorrow.
Tesla's 5.3% senior notes due 2025 are down since my last report and now trading near the lower call price at 102.8 (2.2% ytw; 144 bps). This offers no credible upside, particularly given good odds that the bonds get refinanced soon and likely at an inordinately cheap, unappealing yield (see why in Tesla Goes To Record Extremes To Create Q1 "Profits” on 4/28/21). There’s perhaps 5 points or more in downside risk in the old or refinanced bonds if Tesla’s operations & financial condition deteriorate as I expect. The bonds remain excessively valued versus, for example, even the BoA High Yield general index yield of 4.04% as Tesla is a weak B3/BB- issuer with “CCC” quality metrics on its underlying core profitability and leverage. Maintain "Underperform."
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