Tesla Convertible Debt Electrifies Long-Term Investors

Tesla Convertible Debt Electrifies Long-Term Investors

MATT JARZEMSKY And TELIS DEMOS

March 2, 2014 5:58 p.m. ET

Tesla Motors Inc. TSLA -3.06% is showing that when it comes to Wall Street, it is more than just a plaything for day traders and ardent believers in electric cars.

While the spotlight has focused on the frantic trading driving up Tesla’s share price sevenfold in the past year, less visible have been the company’s efforts to tap big, sophisticated and long-term investors for cash that it needs to expand.

The Palo Alto, Calif., company raised $2 billion in a sale of convertible debt—bonds that can be exchanged for stock—late last week, garnering an audience of big investors such as mutual funds and hedge funds. The deal ranked as the second-biggest sale of convertible bonds in the U.S. in the past two years, according to data provider Ipreo.

Tesla was able to raise 25% more than originally planned. The company intends to use that money in part for construction of a $5 billion plant to build batteries crucial to expanding its business, it said.

A soaring share price isn’t enough to spur growth at companies like Tesla that need capital for big investments in plant and equipment. These companies have to be able to raise cash from investors willing to wait years before reaping returns.

The Tesla offering was well-timed, observers say. A surging share price bolstered the appeal of convertible bonds, which are often seen as riskier than plain-vanilla debt.

“They came off a strong earnings quarter, they announced the factory, people can understand what these proceeds are for,” said Dan Veru, chief investment officer at Palisade Capital Management LLC, which oversees $5 billion in assets and bought some of the debt sold Thursday.

That offering followed a May sale of $1.02 billion in stock and convertible debt, which investors also snapped up. The company went public in June 2010, raising $260 million when it sold stock at $17 a share. The stock rocketed higher starting last spring, as Tesla started to earn plaudits for its vehicles and turned profitable amid fast-growing sales. At Tesla’s offering in May, investors paid $92.24 a share.

The past week alone, the stock is up $35.21, or 17%, to $244.81 after a bullish Morgan Stanley research note projected the shares will go to $320 as the company benefits from expanded battery production.

The share rally highlights investors’ hunger for fast-growing companies, which have become scarce as broader economic growth in the U.S. remains stuck in first gear.

At the same time, many money managers remain wary. Currently, Tesla investors are buying into a story rather than a flourishing business, some investors say. Its car business is tiny by any standard, and it isn’t clear if its battery efforts will be viable.

Meanwhile, the stock is trading at 138 times estimates for 2014 earnings, compared with a price-to-earnings ratio of about 15.5 for the S&P 500 index, according to FactSet. That kind of valuation makes the shares extremely vulnerable to company setbacks.

The ascent of Tesla’s shares has attracted short-term traders, many of whom are individuals. In the past year, the stock has seen more than a dozen sessions in which more than 25 million shares changed hands, which on a typical day would put it among the most actively traded stocks in the S&P 500. Tesla has long been among the most actively traded stocks by customers of TD Ameritrade Holding Corp. AMTD +1.24% , and among the top five stocks by volume the last two weeks, a spokeswoman for the retail brokerage said.

But in tapping the convertibles market, the Tesla deal Thursday was aimed squarely at big institutional investors in control of large sums of money. Tesla declined to comment.

“Tesla has a good story to raise capital with,” said Craig Orchant, partner at EA Markets LLC, which advises companies that are raising capital. “Increasing the size of the deal and getting it done at good terms are not just a function of the dynamics of the market, but of the investor and analyst community’s support for Tesla’s meteoric rise.”

Convertible debt pays interest like a bond but can be exchanged for stock under certain conditions. These securities often see milder swings than the stock of the same company, enabling investors to capture some of the gains of a share-price rally but offering some protection against potential losses.

“The classic growth companies are the kind of thing the convert market loves,” said Eli Pars, who helps manage convertible holdings at Calamos Investments LLC, which oversees $25.8 billion. “If they slip up, the stock may get taken down, but the convertible debt should hold up relatively well.” Mr. Pars declined to say if Calamos bought any of the Tesla debt.

Investors in Tesla’s offering at face value will receive annual interest of 0.25% for the five-year notes or 1.25% for the seven-year notes.

For both bonds, they also will have the option at any time to get 2.8 shares for every $1,000 of bonds they choose to convert, but only if Tesla’s stock is up more than 42.5% from its last price before the offering, or to about $360.

Another reason for the strong appetite for Tesla’s bonds is a lack of supply of convertible notes in recent years. The U.S. saw $45.2 billion of convertible issuance last year, the most since 2008, according to Dealogic.

Tesla’s deal also appealed to sophisticated traders who make money by simultaneously buying convertible securities in a company and short selling—or betting against—the stock. By owning convertible bonds and being short the stock, these traders won’t be on the hook for a rise or fall in the share price, but they will receive the interest payments and could further benefit if the convertibles themselves rise in price.

“This is not a messaging-app company that has little infrastructure-capital-spending needs,” said Huachen Chen, co-manager of Allianz Global Investors’ $4 billion global technology strategy, including the $1.3 billion AllianzGI Technology Fund, which has owned Tesla shares since the months after its initial public offering. “They’re building metal and tires and motors, and they need funds.”

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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