New York: Tesla Inc bonds slid a week after they were sold, as excitement over Elon Musk’s ambitious roll-out of the Model 3 was tempered amid geopolitical tensions and second thoughts among investors about how little they’re getting paid.
The company’s $1.8 billion (Dh6.61 billion) of 5.3 per cent notes due 2025 slipped below par almost immediately, trading as low as 97.4 cents on the dollar on Friday, according to data compiled by Bloomberg. The eight-year securities had priced a week ago at a record-low yield for a bond of its rating and maturity — a touch higher than initial talk of 5.25 per cent — and Tesla had added $300 million to the offering to meet demand.
Musk had personally pitched investors for Tesla’s debut offering in the junk-bond market, ultimately drawing orders for about double the initial offering. The demand allowed the company to boost the size of the sale even as investors and analysts highlighted Tesla’s lack of profit and record cash burn.
“The way that it’s traded is showing that portions of the market just weren’t long-term holders at that price,” Gershon Distenfeld, director of credit at AllianceBernstein LP, said in an interview. “I own a Tesla, I love the product. But I think investors recognise that 5.3 per cent was probably not the right price.”
Tesla, which is rated well below investment grade, has told investors it needs years to generate spendable cash, Distenfeld said in a Bloomberg TV interview. The bond “should trade more like 7 or 8 per cent,” he said.
Palo Alto, California-based Tesla declined to comment on the trading.
The pace of the price decline is notable for a new issue in the bond market, where securities are less prone to the volatility seen in stocks caused by changing economic and political data. What’s more, excess demand typically would prop up trading in the secondary market. Bonds sold in four of the five biggest deals in the high-yield market this year rose more than 2 per cent in the week after pricing, with the fifth trading flat.
The retreat also follows a sell-off in high-yield bonds as investors recoiled from riskier assets amid the political upheaval in the US, terrorist attacks in Europe and geopolitical tensions with North Korea. Morgan Stanley speculated that the beginnings of a correction may be afoot.
Tesla’s stock fell 1 per cent to $348.56 at 3.06pm in New York, following a 3 per cent drop on Thursday. The shares are still up more than 60 per cent this year.
“The high-yield market has been soft in general over the last few days,” said Gene Tannuzzo, senior portfolio manager at Columbia Threadneedle, with about $467 billion under management. “The catalyst for credit weakness may actually be something non-credit related, such as political drama.”