Tesla's Model 3 is hot, but Elon Musk's bonds are junk

To consumers, Tesla is selling electric cars that are gleaming, high-performing machines practically beamed in direct from the future. But in the bond market, Tesla is selling junk.

That’s Wall Street slang for bonds — basically corporate IOUs — that have a higher risk of not getting paid back. Tesla is trying to raise $1.5 billion by selling those kinds of bonds this week, in order to raise cash to ramp up production of its new Model 3 vehicles.

Bond market investors tend to be much more conservative than wild-eyed venture capitalists and eternally optimistic stock market investors, two groups who have poured billions into Elon Musk’s company in recent years. Wild-eyed or not, they’ve done well. Tesla’s share price has risen more than twentyfold since the company went public in 2010.

But conservative bond market investors are less likely to be bamboozled by stories of the explosive growth potential of new technologies that can drive stock prices sharply higher. That’s because unlike stock market investors, bond market investors don’t own a part of the company. They are just lending the company money. So, they’re usually much more interested in a basic question: Does this company have the money to pay me back?

Bear in mind that Tesla has never made a profit in its 14-year corporate history. And it is burning through its cash reserves at a prodigious rate as it attempts to begin large-scale manufacturing of its vehicles.

By traditional standards, that makes it a less-than-ideal candidate to pay back money borrowed through a bond offering. Hence the junk status of Tesla bonds, which have to be repaid in 2025.

But Tesla seems to think that the idea of investing in Elon Musk will be more than enough to convince traditionally cautious bond investors to plow their money into the company’s debt, profits or not. Are they right? We won’t know until the company finishes selling its bonds and we find out what kind of interest investors are demanding to lend to Elon Musk’s profit-free company.

S&P gave a “B-” rating on Tesla’s new bonds. That’s six notches below investment grade, or non-junk status, on the agency’s scale, which goes up to AAA.

Other details to watch:

• Tesla’s market capitalization, or total value as a company, is now over $60 billion. That makes it easily the most valuable U.S. carmaker, handily ahead of General Motors ($51.5 billion) and Ford ($43 billion).
• The Model 3 is a midsized sedan that represents Tesla’s first major effort to make a mass-market car. Its earlier offerings were all luxury vehicles.
• A group of Tesla fans in Italy announced this week that it had driven a Tesla Model S over 1,000 kilometers (about 621 miles) on a single charge, a new record.