Tesla Bond Feeling 100: Hits Face Value for First Time Since 2017

By Matt Wirz 

Tesla Inc.'s $1.8 billion high-yield bond is trading at its full face value for the first time since the electric-vehicle maker issued the debt in 2017.

Crossing the 100-cents-on-the-dollar mark is a symbolic victory for the company because the bond has traded poorly for years and hit a low of 81 cents on the dollar in May, according to data from MarketAxess.

The bond rally comes as prices of Tesla stock and convertible debt rose to records, which some analysts said gives Chief Executive Elon Musk a range of attractive funding options if he chooses to raise new capital.

"The bottom line is he has everything open to him," said Eli Pars, co-head of convertible bonds at Calamos Investments, which owns Tesla convertible debt. "Most of the time, it would have been hard to bring another high-yield deal."

Tesla's high-yield bond traded around 100 cents on the dollar Wednesday morning and late Tuesday with a yield of about 5.3%, down from a yield of approximately 9.5% when the bonds bottomed out in late May. Bond yields fall as prices rise and investors require a lower risk premium to own the debt.

The rally in the bonds tracks a surge in Tesla shares as the company has hit targets to deliver new vehicles and expand into Asian and European markets.

Bond investors have been taking comfort from the company's ballooning stock valuation, analysts said. While most junk debt with the same triple-C credit rating as Tesla's bond dropped in the second half of 2018 amid concerns about rising defaults, the auto maker's bonds climbed in line with a broad rally in U.S. stocks.

Tesla expects to generate enough cash from operations to cover capital expenditures and debt payments, but it may issue new equity, convertible bonds or debt, the company said in an October earnings report. Selling new stock would dilute existing shareholders but avoid encumbering the car maker's balance sheet, while issuing new bonds would increase its annual interest expense.

Issuing new convertible bonds could strike a happy medium, Mr. Pars said. The convertible bond Tesla sold at a 2% interest rate in May has rallied about 60% since then and now trades around 167 cents on the dollar, according to data from MarketAxess. That indicates Tesla could issue new convertible bonds at an interest rate nearer to 1%, Mr. Pars said.

A spokesperson for Tesla couldn't immediately be reached for comment.

U.S. Treasury yields rose Wednesday following strong employment data after an initial drop from Tuesday's close spurred by increased conflict in the Middle East. The yield on the benchmark 10-year note initially fell to around 1.770% from 1.825% Tuesday but has since rebounded to about 1.820% after ADP's December jobs figure came out stronger than expected.

The WSJ Dollar Index, which measures the U.S. currency against a basket of 16 others, rose Wednesday to 90.15 from 90.04 on Tuesday.

Write to Matt Wirz at [e-mail]

(END) Dow Jones Newswires

January 08, 2020 12:16 ET (17:16 GMT)

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