Tesla's five-year convertible note carries a coupon of just 1.5%, in line with borrowing costs under the DOE loan program, and a conversion price of $124.52, a 36% premium from current prices.
The note offering and DOE loan repayment will give Tesla more flexibility as the company tries to grow in coming years, while only marginally increasing the company's borrowing costs. Tesla's DOE loans carried restrictive covenants that precluded the company from raising additional debt.
Were Tesla to report meaningful profit and cash flow in coming quarters, it could have found DOE loans restricted the company from raising debt at current low rates. The company's loans now also come due in 2018 instead of at an accelerated schedule, meaning Tesla will benefit longer from the 1.5% rate it was able to get from markets.
Had Tesla waited a few years to raise capital to repay DOE loans, it's highly likely the company would have had to pay far higher interest rates.With note financing in place, Tesla also has set the stage to get its next round of capital at advantageous prices. Were Tesla shares to continue motoring higher and past the $124 a share note conversion price, the company may essentially raise its next $600 million in equity capital by issuing less than 5 million new shares. This is what Tesla's stock issuance would look like:
- Tesla priced an initial public offering of 13.3 million shares at $17 apiece, raising $226.1 million in capital on June 28, 2010.
- Tesla priced a secondary offering of 6.92 million shares at $28.25 apiece, raising $195.65 million in capital on September 28, 2012.
- The company priced another secondary offering of 3.93 million shares at $92.4 apiece, raising $313 million in capital on May 17, 2013.
- Tesla's convertible notes would effectively convert into 4.81 million shares at $124.52 apiece, raising $600 million in capital.
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