Tesla has found a sufficient appetite for his latest convertible loan

NEW YORK (Reuters) – Demand for $ 1.35 billion convertible bonds sold by the electric builder should be subject to sufficient demand from Tesla Inc., although the Terms offered by this contract appear lower than those of a similar agreement two years ago, investors said Thursday.

And the volatile and largely underperforming title of Tesla is one of the reasons why, they explain.

Convertible securities present the income and protections of a low-yield bond, but offer the opportunity to derive a greater profit from a stock price jump that triggers a stock refund rather than In cash.

As part of the new deal, which is being sold with $ 650 million of new stock, Tesla is seeking to offer an interest rate lower than the coupon of its previous convertible two years ago. , although interest rates are now generally higher. There is also a higher bar to take advantage of the stock price.

Investors, however, said the new deal looks attractive compared to Tesla's existing convertible bonds, which now offer even leaner returns and, given the current volatility of the stock, an even lower chance of converting. in rich stocks before the maturity of these bonds the next three years.

"With this new obligation, you have five years left to make the bond pay. They must not succeed, they must not hit a homerun. They just need to stay in business to refinance that in five years, "said Geoffrey Dancey, Managing Partner and Portfolio Manager at Cutler Capital Management.

Fundraising – which could reach $ 2 billion in total – eases Wall Street's worries about the automaker, which is struggling to maintain its profitability and ability to weather a decline in sales and create new lines of business. products. Tesla shares, which had fallen nearly 10% in the two years since the sale of its last convertible, ended up more than 4% Thursday.

The new convertible bond would carry a coupon of between 1.5% and 2.0% and a conversion premium of between 27.5% and 32.5% of the reference price of Tesla shares at the time of sale, according to an operator who would have seen preliminary marketing information. for the transaction on Thursday.

For investors, these conditions appear to be less favorable than the 2.375% coupon on the $ 977.5 million convertible bond maturing in March 2022, but it is higher than the current yield on this bond from 2022 to around 1%, said Dancey.

At first sight, the conversion premium put forward, with a midpoint at 30%, is also unfavorable compared to the 2022 bond's lower conversion premium of 25%. But the underperformance of the stock, which closed at $ 244.10 on Thursday, means that holders of the 2022 bond need an increase of at least 34% in the stock, to reach 327, $ 50, to trigger a conversion.

"The terms of the convertible seem reasonable, and I do not think they have any problems to sell," said Dancey, who could buy some of the new bonds. There is no existing post.

The legion of short sellers of Tesla securities, which often buy convertibles as a hedge, is a common arbitrage used by hedge funds, said Eli Pars, co-chief investment officer at Calamos Investments. More than 25% of Tesla's public stock is sold short.

"I did not hear anything that would make me think it would be hard to do," said Pars. Calamos holds positions in the convertible securities of Tesla and its solar panel manufacturing business, Solar City, according to its latest filing with the SEC.

"Convertible bonds offer many opportunities for things to go well," he said.

Ross Gerber, managing director of investment manager Gerber Kawasaki, known for his bullish positions on Tesla, said the "noise" surrounding Tesla – including the recent legal battle between chief executive Elon Musk and SEC for his tweets – had shook some of his clients.

"When we build a wallet, Tesla will be part of it. But what we will probably do is add more convertible capital than equity, "he said.