By Sebastian Pellejero
The latest beneficiaries of Tesla Inc.'s surging shares: bondholders.
Prices for Tesla's traditional bond due in 2025 reached a record 104.36 cents on the dollar Tuesday, according to MarketAxess, after the electric-car maker said it would sell up to $5 billion in stock, bolstering its balance sheet after a 5-for-1 stock split Monday.
That marks a rebound from lows around 79 cents during the worst of the pandemic's market turmoil and the latest big swing in the company's bond prices. Since snapping up the company's first conventional bond offering in 2017, investors have questioned where Tesla would get the money to repay debt as it burned cash and struggled to turn a profit. In 2018, the bonds were near 85 cents on the dollar following a ratings downgrade and stock price declines.
For many, Tesla's surging market value has now answered that question. Shares have soared since the March lows, fueled by investors' bets that the company and its technology are poised to change the world. Tesla shares are up more than 1% this week, boosting the company's market capitalization above $416 billion -- bigger than Fiat Chrysler Automobiles NV, Ford Motor Co. and General Motors Co. combined.
That rise has prompted some investor shifts. Baillie Gifford & Co., the Scottish investment house that is Tesla's second-largest shareholder after Chief Executive Elon Musk, said Wednesday that it had reduced its stake in the company because of internal guidelines around the size of a single stockholding, but intends to remain a significant shareholder.
While stock investors' enthusiasm for Tesla's prospects has helped send shares through the roof, bondholders remain more circumspect about the company. In part, that is because Tesla has often spent more cash than it generates. Its high valuation means it can easily raise money, but skeptics say the car maker will have to become a consistent cash generator to make its bonds trade consistently at higher levels.
Tesla in July reported a fourth-consecutive profitable quarter for the first time in company history, and, according to estimates by research firm CreditSights, it is on pace to sell around 430,000 vehicles this year, far fewer than its U.S. competitors. The company had about $8.5 billion in debt, excluding vehicle and energy-product financing, at the end of last quarter.
Tesla has added more than $341 billion in market value this year despite posting just $120 million in net income for the first two quarters, supported by selling regulatory credits and improving profitability in China. Shares fell 4.7% Tuesday after the company disclosed its stock-selling plans.
"It's been a roller-coaster ride for bond investors," said Hitin Anand, industrials analyst at CreditSights. "Right now, the good news is Tesla has a lot of options at the table."
Those options make the company's debt more appealing to some, because the company has more ways to raise money to repay bondholders. While Tesla's growth and potential to reshape the automobile industry have helped power stock gains, debt investors tend to worry more about companies being able to produce stable cash flow that can be used to make interest payments.
"We did not find the [company's bonds] attractive when they were issued, but we do now because of Tesla's access to very low-cost capital," said Bill Zox, portfolio manager at Diamond Hill Capital Management.
Mr. Musk -- now the world's fourth-richest person, according to Bloomberg -- has had a complicated relationship with fundraising, expressing reluctance toward issuing stock over concerns that it would dilute existing shareholders. The company raised $2 billion through a secondary stock offering in February and sold more than $2 billion of stock and convertible bonds -- a hybrid of debt and equity -- in May 2019.
Tesla didn't respond to requests for comment.
A $5 billion stock sale could dilute Tesla shareholders by 2% to 3%, said Dan Ives, an analyst at Wedbush Securities Inc. But the benefits may outweigh any dilution, he said, since that money will get the company out of debt from a cash perspective, as well as help support the build out of its Gigafactory plants in the U.S. and Europe.
Tesla had around $8.6 billion of cash and equivalents as of June 30, according to company filings.
Prices for Tesla's convertible bonds have skyrocketed to more than 614 cents on the dollar. That leaves the company with another option to help bring down debt, if needed, since Tesla could induce holders to convert into stock without much added compensation, said Eli Pars, co-chief investment officer at Calamos Investments.
"It all depends on what [Tesla] thinks is its timeline for spending money," Mr. Pars said.
--Dave Sebastian contributed to this article.
Write to Sebastian Pellejero at firstname.lastname@example.org
Corrections & Amplifications
This article was corrected on Sept. 3, 2020 because the original version incorrectly spelled Baillie Gifford & Co.'s name as Ballie Gifford.