Tesla Puts Gigafactory Up For Collateral In Debt Offer, But Some Lenders Aren’t Biting

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Chris White Tech Reporter
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Elon Musk is offering up Tesla’s Gigafactory as collateral for lenders willing to sink $1.5 billion into the financially strapped automaker, but some would-be buyers appear hesitant to take the deal.

The Tesla CEO called the massive factory the “alien mothership” during a Monday call with would-be bond buyers. He also invited the lenders to see the Nevada-based Gigafactory, so they could see the facility where Tesla intends to produce the new Model 3.

Analysts don’t appear enthralled with the $1.5 billion offer, because the company’s offer essentially exempts rules meant to prevent Tesla from using the factory as collateral for even more debt. The lenders are concerned that they could be left owning a giant empty building in the desert if Tesla folds under pressure from larger competitors.

A large bond offering usually targets a company’s most important asset and caps the amount of secured debt that can be yoked to it, Valerie Potenza, the head of high-yield research at Xtract Research, told reporters after Musk’s call. Tesla has constructed the offering to raise more money using Gigafactory 1 as collateral, pushing previous creditors lower on the totem pole.

Mark Holman, the chief executive officer of London-based TwentyFour Asset Management, told reporters that he does not have a lot of confidence that Tesla will be able to throttle larger companies such as Volkswagen and GM. Tesla should be burning through equity, not debt, Holman said.

“No way am I buying it,” he added. “We are only at the very start of electric cars. Tomorrow, the German carmakers could all get together and fund a new type of battery. Where will Tesla be then?”

But Tesla hopes the Model 3, which debuted at the end of July, will help the Silicon Valley company become the top carmaker on the block. Pre-orders for the small sedan have already surpassed half a million, even as customers have started bailing on the vehicle.

Total orders for the Model 3 tumbled to 455,000 from a high of 518,000, CEO Elon Musk told reporters, but the news of the defections didn’t seem to bother the billionaire tech entrepreneur. He compared the dropped orders to customers at a restaurant that drop out of line because they’re tired of waiting for their vehicles.

Analysts have scrutinized Tesla’s financial in the past. The company’s “financing model is fragile,” tech analysts with Devonshire Research Group said in a research note last year about Tesla’s increasingly complex business model. “It is attempting to manage multiple financial instrument models under the same accounting umbrella — to our knowledge, one of the last companies to attempt this level of financial innovation was Enron.”

One minor “misstep in the next two years,” the group added at the time, “risks entering a death spiral.”

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