Yesterday, Tesla Motors (TSLA) priced $2 billion in convertible bonds to help fund the building of its gigafactory. To some managers, the generous terms Tesla received on the deal are just another sign of a frothy market.
REUTERS MKM Partners’ Keith Moore explains:
As the S&P 500 Index continues to make new highs, the debate among money managers continues as to how much upside might be left in equities. Many market participants have noted some lofty valuations, especially in the tech sector. Yesterday’s sale by Tesla of $2 billion in convertible notes may also provide some cause for concern. In what is the largest US convertible offering in several years, Tesla was able to raise capital with a coupon of only 25 basis points on the five-year paper and 125 basis points on the seven-year notes with a conversion premium of about 42%.
As my colleague Randall Forsyth noted yesterday, Tesla is making “the most of irrational exuberance.” He writes:
The rich expected conversion premiums on the Tesla convertibles indicate the company effectively is selling high-priced calls on its high-priced stock attached to its high-priced (that is, low-yielding) bonds…
The cruel irony is Tesla’s stock, with a triple-digit multiple of this year’s estimated earnings, may provide scant future returns to investors — even as the company revolutionizes the automobile industry.
Shares of Tesla have dropped 3.2% to $244.42 today at 2:58 p.m. No apocalypse was reported, as the S&P 500 has gained 0.1% to 1,856.84–a new high.
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