Tesla putting up its factory as collateral

5.3 million square-foot plant helps raise cash

NEW YORK — Tesla has changed the terms of its borrowing agreement with banks to allow it to pledge its Fremont auto plant as collateral — a move seen by some analysts as an effort to boost liquidity.

The electric car maker has just $543 million of the $1.8 billion credit facility left to use, according to a regulatory filing on Monday. But banks periodically review the amount they are willing to lend, and Tesla continues to burn through cash.

"While not clear at this point, we suspect that with the large upcoming cash burn in 2Q18, the banks have demanded additional collateral protection for Tesla to maintain its $1.8 billion facility," CreditSights analysts said in a note.

"In doing so the banks are protecting themselves."

A person familiar with the matter told Thompson Reuters IFR the amendment had not been requested by the banks and was at the company's discretion.

But the 5.3 million square-foot plant in Fremont, California, would give banks a claim on one of Tesla's most valuable assets. It is the production hub of Tesla's mass-market Model 3 sedan, which is seen as key for the company's path to profitability.

Tesla, however, is struggling to ramp up production of the car. It is trying to build 5,000 of the vehicles per week by the end of June and overcome manufacturing hurdles that have delayed its rollout.

"They are still going to burn cash for a couple of years," said Scott Roberts, head of high yield investments at Invesco, who does not own Tesla bonds.

"They are shoring up liquidity before they need to probably because they think they will need it."

Chief Executive Elon Musk has promised investors that the company will swing to a profit in the third quarter, after accumulating losses for several quarters.

He has also said the company does not need new funding, but many analysts and investors believe Tesla will need to raise more capital by the end of this year.

CreditSights said the company has some options. Its current capital structure includes convertible bonds, one junk bond and the bank credit facility.

But it could also add a secured revolver and a term loan with the right mix of assets provided as collateral to help fund its ongoing heavy capital needs and to fund near-term maturities including a convertible bond that matures next year.

Tesla previously pledged accounts receivables, inventory, and equipment as collateral for the credit facility, which was signed by a group of nine lenders led by Deutsche Bank.

It could offer up other valuable assets, such as its Gigafactory in Nevada or its intellectual property, to secure additional cash, CreditSights said.

Raising new debt could prove expensive as the company's only junk bond — a $1.8 billion unsecured issue sold last summer to help finance production of the Model 3 — has plummeted in price to trade at just 87 cents on the dollar for a yield of 7.7 percent.

And seeing a valuable asset like the Fremont factory encumbered so soon after that bond was sold may make investors even more cautious.

"The more assets that get encumbered, the more questions will be asked about why," said CreditSights.

Reporting by Davide Scigliuzzo

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