Tesla Drives Forward with $1.8 Billion EV Lease Securitization

Tesla drivers remain undeterred by the Federal Reserve's rate hikes, as the company seeks to secure a new, record-breaking $1.8 billion securitization for its electric-vehicle leases. This move marks the largest batch of leases from Tesla Inc. to be transformed into bonds since the program's inception in 2014, according to a Fitch presale report.

Unveiling a Lucrative Opportunity

Tesla plans to generate interest in approximately $1 billion worth of notes, which will be divided into five classes of bonds, each possessing ratings ranging from Triple A to Double A. However, preliminary marketing materials suggest that the lower-rated tranches will not be available for sale.

By utilizing these proceeds, Tesla can expand its lease program and explore alternative avenues of funding beyond the corporate bond market. This development comes alongside an impressive year for Tesla, with shares rising by 124.1% thus far in 2021 (according to FactSet), and a 1.8% increase on Thursday alone.

A Financial Landscape in Flux

In previous Tesla bond deals, investors were rewarded with coupons ranging from 5.6% to 6.4%. In contrast, a bond deal from 2021 only offered coupons of 0.16% to 1%, reflecting the near-zero rates enforced by the Federal Reserve at the time (according to data from Finsight). However, with the recent increase in corporate borrowing costs due to rising rates, this new securitization serves as an opportunity for Tesla to secure favorable terms.

As Tesla continues to redefine the automotive industry and push the boundaries of electric mobility, it seems that investors and drivers alike are eager to join the journey of sustainable transportation.

Increased Demand for New Bonds Provides Tesla with Larger Financing

According to an investor, if there is high demand for the new bonds, bankers have the ability to increase the size of their classes, resulting in a larger financing opportunity for Tesla. The pricing for this transaction is expected to take place next week, and Tesla has yet to respond to requests for comment.

Despite the aggressive interest rate hikes by the Federal Reserve over the past year to control inflation, recent data shows that U.S. consumers have remained relatively resilient. However, subprime borrowers are experiencing difficulties due to the higher cost of debt.

Jen Ripper, an investment specialist at Penn Mutual Asset Management who focuses on securitized products, prefers investing in shorter-duration bonds backed by prime borrowers. Ripper cited the upcoming resumption of student debt repayments and the increased leverage of households from pandemic lows as reasons for her preference.

Ripper stated in a client note on Thursday, "Along with rising debt balances, interest rates on consumer debt are also rising."

Fitch reports that leases in the new Tesla deal are supported by prime borrowers who have a weighted average interest rate of 5.06%. This is higher than the 4.9% interest rate seen in an earlier Tesla deal this year.

In related news, Tesla may potentially benefit from the Big Three-UAW labor talks.

On Thursday, stocks closed with significant gains. The Dow DJIA experienced a gain of over 300 points, ending up 1%. The S&P 500 index SPX rose 0.8%, and the Nasdaq Composite Index COMP advanced 0.8%, according to FactSet.