Tesla is reaching out to potential investors for a new securitization of its electric-vehicle leases, amounting to a whopping $1.8 billion. This marks the largest batch of leases to be converted into bonds since Tesla began originating them in 2014. The company plans to split approximately $1 billion of notes into five classes of bonds, with ratings ranging from Triple A to Double A. Conversely, lower-rated tranches will not be marketed for sale. The funds generated from this securitization can be used by Tesla to further its lease operations, providing an additional source of funding beyond the corporate bond market.
Tesla’s shares rose by 1.8% on the day of the announcement, reflecting the market’s confidence in the company’s financial prospects. A similar bond deal conducted by Tesla in July featured coupons for investors ranging from 5.6% to 6.4%. However, with the increase in Federal Reserve interest rates, the bonds from 2021 only provided rates of 0.16% to 1%. It is important to note that Tesla’s current bond deal is not expected to be priced until next week.
This move by Tesla to secure funding through securitization is a testament to the resilience of U.S. consumers despite the Federal Reserve’s aggressive rate hikes. However, the rise in corporate borrowing costs is impacting subprime borrowers, who are finding it harder to manage their debt. Investors, such as Jen Ripper from Penn Mutual Asset Management, prefer shorter-duration bonds backed by prime borrowers due to the imminent resumption of student debt repayments and the increase in household debt from pandemic lows.
The electric-vehicle leases in the new Tesla deal are backed by prime borrowers who are paying an average interest rate of 5.06%. This is an increase from the 4.9% seen in a previous Tesla deal earlier this year.
In summary, Tesla is seeking $1.8 billion through securitization of its electric-vehicle leases, providing an alternative funding source beyond the corporate bond market. Despite the increase in borrowing costs, Tesla’s confidence in the demand for its bonds is evident as it plans to expand the size of its bond classes. The securitization deal is set to price next week.
– Fitch Ratings
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