Mar 2 at 17:55By Matt Jarzemsky and Telis Demos
Tesla Motors Inc. 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., 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."
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(END) Dow Jones Newswires
03-02-14 1755ET
Copyright (c) 2014 Dow Jones & Company, Inc.
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