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Tesla, Inc. Bonds See Overwhelming Demand

Tesla continues to have no trouble raising money to help fund its capital-intensive expansion for Model 3 production ramp-up. Despite receiving a junk rating from Moody's, Tesla's (NASDAQ: TSLA) bond offering last week was oversubscribed.

Tesla announced on Friday that its proposed $1.5 billion senior note offering ended up generating $1.8 billion in aggregate principal notes, or 20% more than Tesla was initially looking for.

Tesla vehicle production. Image source: Author.

The bond market is optimistic about Tesla

Tesla's decision to sell 20% more notes than originally planned reflects "overwhelming demand" for the notes, according to Thomson Reuters' International Financing Review unit.

The electric-car company's ability to generate so much interest in its bond offering highlights how heavily the market is betting on Tesla's recently launched Model 3. Not only were Tesla's bonds oversubscribed, but the yield Tesla secured was a record low for junk-rated bonds. The notes Tesla agreed to sell, which are due by 2025, were secured at a yield of 5.3%. The average yield on junk-rated bonds by the end of last week was 5.72%.

Tesla's ambitious Model 3 plans

Tesla's decision to fortify its balance sheet comes shortly after the company started delivering the first Model 3 units, and just as Tesla attempts to aggressively ramp up Model 3 production.

Tesla "intends to use the net proceeds from this offering to strengthen its balance sheet during the period of rapid scaling with the launch of Model 3, and for general corporate purposes," management said in an 8-K filing on Friday. Tesla estimates it will generate $1.77 billion of net proceeds from the offering, after deducting fees and expenses.

Tesla CEO Elon Musk has referred to the automaker's current phase of increasing its Model 3 production as "production hell." With the Model 3's production growth forecast to occur on an S-curve, Tesla only expects to deliver about 100 Model 3s in August and 1,500 in September. But by the end of the year, Tesla expects to achieve a weekly production rate of 5,000 units. 

Model 3 production timeline. Image source: Tesla. 

Next year, Tesla expects Model 3 production to expand further. At some point during the year, the electric-car maker anticipates hitting a production rate of 10,000 vehicles per week. Furthermore, Tesla expects to produce 500,000 total vehicles in 2018, up from an annualized production rate of about 100,000 vehicles today.

Addressing concerns

Any concerns the bond market may have had going into Tesla's debt offering may have been mitigated by a conference call about the offering, in which Tesla management shared some important updates on its business.

During the conference call, Tesla reportedly revealed the battery sizes of the Model 3. The entry-level 50 kilowatt-hour battery for the standard Model 3 may have been smaller than some investors were expecting, bolstering the case for Tesla's ambitious target of achieving a 25% gross profit margin for the Model 3 next year.

Furthermore, CEO Elon Musk reportedly said during the conference call that the company now anticipates Model 3 demand can eventually support annual Model 3 deliveries of 700,000 units, up from Tesla's previous projection for 500,000 units.

With $1.8 billion of new debt on its books, the stakes are high for Tesla to deliver on its promises for the Model 3.

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Daniel Sparks owns shares of Tesla. The Motley Fool owns shares of and recommends MCO and Tesla. The Motley Fool has a disclosure policy.