Tesla Motors, the US electric car company whose shares have soared almost 70 per cent this year, raised $2bn from the largest US convertible bond sale in more than two years after increasing the size of its offering due to strong investor demand.
The proceeds from the sale will be put towards Tesla’s plan to build a vast new battery factory that has electrified investors and powered its shares to a record high this week.
Tesla, which is seeking to sell 35,000 vehicles this year, reached a market capitalisation of $31bn on the back of its fast-climbing share price this week. That has led some to question whether its gains are an indication of a bubble forming in parts of the technology sector. At that level, Tesla’s market cap is about half that of Ford or General Motors, which sell a far greater number of vehicles annually.
Convertible bonds are hybrid securities that allow issuers to offer debt with lower coupons than they would otherwise be compelled to pay from traditional bond market offerings.
The securities, however, also give investors the option to convert the bonds into stock if the issuer’s share price reaches a predetermined premium during the bond’s tenure.
Technology companies including Yahoo have looked to convertible bond offerings to raise funds as supply of new deals in the market has barely kept up with the pace of maturing deals. That imbalance has allowed companies with volatile share prices to attract investors with very favourable terms, according to analysts.
Tesla sold $800m in five-year notes and $1.2bn in seven-year notes as part of the deal on Thursday, according to a person familiar with the matter. The five-year notes will carry a coupon payment of 25 basis points and the seven-year notes will pay 125 basis points. Both bonds have an equity conversion premium of 42.5 per cent.
The company had originally sought to raise $1.6bn, but the deal was increased due to heavy demand from investors, according to a person familiar with the matter.
If underwriters, including Goldman Sachs and Morgan Stanley, elect to exercise an overallotment provision, the size of the offering could reach $2.3bn.
The offering is the largest convertible bond deal in the US since MetLife raised $3.3bn in March 2011, according to Dealogic. The sale marked the second time in as many years that Tesla has turned to the convertible bond market to help finance its business.
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