The search for capital is one of the most important quests that a company has to go on. Tesla, a company that is widely known for its groundbreaking technology, is no stranger to the world of investment capital. Elon Musks’s company may be innovative and unique, but it has not been particularly profitable. The number of times Musk has offered shares of his company in the equity market is close to double digits, but this time around he seems to be going for something a little different. Musk is opting for the bond market instead of the equity market, possibly in an attempt to try something new.
Tesla will be offering eight year bonds that will amount to a grand total of a whopping $1.5 billion. This large amount is required in order to finance a cheaper model of the revolutionary Tesla electric car. This vehicle, dubbed Tesla Model 3, is known for being far more environmentally friendly than other vehicles out there, but it has not brought in much profit for the tech company. These bonds, once bought, will allow the company to cover its losses and pay for expenses, hopefully resulting in a period of profitability. The mass production of the Tesla Model 3 is pivotal to Musk’s future plans.
The bonds are going to be a tough sell considering the torrid time this market has seen in recent times. The fact that Tesla does not have a very good record when it comes to profits is certainly not going to help. That being said, Elon Musk is probably one of his company’s most important assets. He has a recognizable face, and the brand that is his name inspires trust even if the company it is attached to doesn’t. It is possible that Musk would pitch this as an investment in him rather than an investment in a company that has turned to the equity market time and time again and has failed to turn a profit in spite of this.
Musk apparently knows of his company’s reputation, and has offered a percentage on these bonds that conforms to a “junk company” rate. According to anonymous sources, five percent is being offered on each note. This is shockingly low for a company as famous as Tesla, but at the end of the day it is important to realize that Tesla really does not have much of a choice after round after round end in a financial loss.
It is pretty easy to say that this gamble is going to pay off in the short term. People will buy these bonds and the funding for the next batch of Tesla vehicles will come through. But what about the long term? Only time will tell if Elon Musk’s gambit will pay off. All one can say is that there is so long that a company can run on fumes in this manner.