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Burning Through Cash, Tesla Puts Up its Fremont Factory As Collateral

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【Summary】Tesla has voluntarily changed the terms of its borrowing agreement with banks, allowing the company to put up its Fremont, California assembly factory as collateral, a move seen by some analysts as an effort to boost the company's liquidity.

Eric Walz    May 09, 2018 2:27 PM PT
Burning Through Cash, Tesla Puts Up its Fremont Factory As Collateral
author: Eric Walz   

Tesla has voluntarily changed the terms of its borrowing agreement with banks, allowing the company to put up its Fremont assembly factory as collateral, a move seen by some analysts as an effort to boost the company's liquidity.

The electric car maker has just $543 million of the $1.8 billion credit facility left to use, according to a regulatory filing on Monday. However, banks periodically review the amount they are willing to lend, and Tesla continues to burn through cash quickly as it struggles to ramp up production of the more affordable Model 3.

"While not clear at this point, we suspect that with the large upcoming cash burn in 2Q18, the banks have demanded additional collateral protection for Tesla to maintain its $1.8 billion facility," CreditSights analysts said in a note to Reuters.

"In doing so the banks are protecting themselves."

A person familiar with the matter told Thomson Reuters IFR the amendment had not been requested by the banks and was at Tesla's discretion.

The company's sprawling 5.3 million square foot plant in Fremont, California, would give banks a claim on one of Tesla's most valuable assets. It is the production home of Tesla's mass-market Model 3 sedan, Model S and Model X.

Tesla, however, is still struggling to ramp up production of the Model 3. Tesla is working to hit a production target of 5,000 Model 3's per week by the end of June and overcome manufacturing bottlenecks that have delayed its rollout.

"They are still going to burn cash for a couple of years," said Scott Roberts, head of high yield investments at Invesco.

Tesla CEO Elon Musk has promised investors that the company will swing to a profit in the third quarter, after accumulating losses for several consecutive quarters. He has also said the company does not need any new funding, however many analysts and investors disagree.

CreditSights said the company has some options. Its current capital structure includes convertible bonds, one junk bond and the bank credit facility. Tesla could offer up other valuable assets, such as its Gigafactory in Nevada or its intellectual property, to secure additional cash.

Tesla could also add a secured revolver and a term loan with the right mix of assets provided as collateral to help fund its ongoing heavy capital needs and to fund near-term maturities including a convertible bond that matures next year.

Tesla previously pledged accounts receivables, inventory, and equipment as collateral for the credit facility, which was signed by a group of nine lenders led by Deutsche Bank.

Raising new debt could prove expensive as the company's sole junk bond, a $1.8 billion unsecured issue sold last summer to help finance production of the Model 3, has plummeted in price to trade at just 87 cents on the dollar for a yield of 7.7 percent, according to IHS Market.

In March, Tesla's credit rating was downgraded by Moody's Investors Service as the electric car company continues to burn through cash while failing to meet production targets for the Model 3.

Last week, Moody's said it expects Tesla will need to raise about $2 billion in new capital this year.

The move is not all bad news for Tesla. The company's electric vehicles remain wildly popular. Over 400,000 people have placed deposits for the Model 3. If Tesla can solve its production problems, the Model 3 just might become the world's best selling electric car.

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