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Tesla High Yield Debt Slides on 1Q Update, and as Musk Dodges Model 3 Questions

Tesla’s debut bonds fell this morning after the company released mixed first-quarter results after the closing bell yesterday. CEO Elon Musk, on the post-earnings call with analysts late yesterday, also raised eyebrows with his evasion of analyst inquiries into developments surrounding the electric car manufacturer’s critical Model 3 sedan.

The 5.3% notes due 2025 were changing hands as low as 87 today, indicating a roughly 2.25-point decline on the day, according to MarketAxess. The notes priced at par in August 2017 and plumbed lows of 86 in early April following a March 27 ratings cut by Moody’s, which at that time also lowered the issuer’s outlook to negative, from stable, citing negative free cash flow, liquidity pressures, and a “significant shortfall in the production rate of the company’s Model 3 electric vehicle.”

Tesla now says it will become cash flow positive in the second half of 2018 as the company ramps up production and deliveries of the Model 3 sedan, which the issuer said yesterday is “already on the cusp of becoming the best-selling mid-sized premium sedan in the U.S.”

Bruce Clark, lead auto analyst and Moody’s senior vice president, said today that Tesla “showed important progress by sustaining Model 3 weekly production above 2,000 units for three consecutive weeks.”

“Nevertheless, the company remains in an intense ‘learn-as-they-go’ process while attempting to reach production efficiencies necessary for a Model 3 production rate of 5,000 per week, a Model 3 gross margin of 25% and breakeven cash flow,” Clark added. “We continue to expect that Tesla will need to raise new capital approximating $2 billion—in the form of equity, convertible notes, or debt—in order cover a cash burn during 2018, and to refund a total of $1.3 billion of convertible debt that matures in late 2018 and early 2019.”

On yesterday’s conference call with analysts, discussing the subject of Model 3 reservations and capital requirements, Musk proved evasive, declining to answer and making the statements: “These questions are so dry,” “they’re killing me,” and “Boring questions are not cool. Next.”

Musk also said on the call that he is “quite confident about achieving GAAP net income and positive cash flow in 3Q,” highlighting that Model 3 gross margins should approach a range of about 20% by the end of 2018, as part of a steady trajectory toward a 25% target.

Tesla said first-quarter revenue totaled $3.4 billion, topping analyst expectations by roughly 3.3%, based on consensus data compiled by S&P Global Market Intelligence. The company booked a pretax loss of roughly $779 million for the quarter, slightly wider than the consensus estimate of $764 million.

Tesla also reduced its expectations for 2018 capital expenditures to less than $3 billion, from guidance of more than $3.4 billion previously. “Ultimately, our capex guidance will develop in line with Model 3 production and profitability,” the company said. “We will be able to adjust our capital expenditures significantly depending on our operating cash generation.”

On the liquidity front, Tesla reported $2.7 billion in cash at the end of March, down $700 million from a $3.4 billion cash balance at the end of 2017.

Tesla bonds have been pressured over the past several months as adjusted EBITDA and free cash flow for the past two quarters fell shy of analyst estimates. The company placed its debut 2025 offering in August to bolster its balance sheet and for general corporate purposes ahead of the launch of the Model 3, its first electric car designed for the mass market. The $1.8 billion tranche size was upsized from $1.5 billion.

Corporate and bond ratings are B–/B3 and B–/Caa1, respectively, with negative outlooks by S&P Global Ratings and Moody’s, and 3 recovery rating on the unsecured notes by S&P Global.

Tesla is a Palo Alto, Calif.–based manufacturer of electric vehicles as well as energy storage and solar products. — James Passeri/Jakema Lewis

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April Performance by Industry, US High Yield Bond Market

High yield expert Martin Fridson, on industry performance in the U.S. bond market (part of Marty’s weekly commentary for LCD):

Telecommunications led the 20 major high-yield industries in return in April, doubling the performance of the second-place finisher, Energy. Notwithstanding the outsized returns on Sprint issues (word emerged last month that Spring and T-Mobile were discussing a merger), the Telecom rally was quite broad-based. The non-Sprint portion of the ICE BofA Merrill Lynch High Yield Telecommunications Index returned 2.26%, still well ahead of runner-up Energy. As usual, Energy’s performance was closely tied to crude oil prices. As measured by West Texas Intermediate futures, the price surged from $64.87/bbl., to $68.57/bbl. in April.

Automotive & Auto Parts finished dead last, as it did in March. This time the industry’s return was strongly skewed by a single issuer, American Tire Distributors, which lost distribution rights for the Goodyear, Dunlop, and Kelly tire brands. The ATD 10.25% notes due 2022 accounted for just 2.3% of the ICE BofA Merrill Lynch High Yield Automotive & Auto Parts Industry’s market value, but its –47.12% return dragged down the –0.60% return for the rest of the group all the way to –1.69%. That being said, Automotive & Auto Parts was the only major industry to post a negative return in April. 

Mary’s full weekly analysis is available to LCD News subscribers here. 

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WeWork Wraps Debut High Yield Offering at $702M

WeWork has completed its first-ever bond print—$702 million of seven-year notes—at the mid-point of price guidance, sources said. J.P. Morgan was lead bookrunner for the bullet paper, which was upsized amid investor demand from $500 million. Proceeds will be used for general corporate purposes. The New York–based company provides workspaces, community, and services for customers that range from entrepreneurs, freelancers, startups, artists, small businesses, and divisions of large corporations. In an April 24 report, analysts at S&P Global Ratings said the B corporate rating assigned to WeWork reflects the borrower’s “substantial growth investments and resulting negative cash flow, duration mismatch between its long term lease obligations and short term member contracts, exposure to an entrepreneurial workforce vulnerable to economic cycles, and participation in a relatively early stage, highly competitive, and low-barrier-to-entry market.” The rating agency added that these risks, however, are partially offset by WeWork’s large cash position, positive working capital, technological capabilities, operational and cost efficiencies, solid position in developed markets, growing scale within the co-working space and associated network benefits. Moody’s and Fitch have assigned B3/BB– corporate ratings to WeWork. – Jakema Lewis

 

Issuer WeWork Companies
Ratings B+/BB–/Caa1
Amount $702 million
Issue Senior (144A/Reg S-for-life)
Coupon 7.875%
Price 100
Yield 7.875%
Spread T+491
Maturity May 1, 2025
Call non-call life
Trade April 25, 2018
Settle April 30, 2018 (T+3)
Joint bookrunners JPM/C/DB/GS/HSBC/BAML//MS/UBS/WF
Price talk 7.75-8.00%
Notes Upsized from $500 million; up to 30% equity claw @ 107.875 until May 1, 2022; make-whole @ T+50; change of control put @ 101

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WeWork, in High Yield Market Debut, Eyes $500M

WeWork is circulating talk for its debut offering of $500 million of seven-year (non-call life) notes at 7.75–8.00%, aligning with early market whispers, sources said. Books will close tomorrow, April 25 at 1 p.m. EDT.

Pricing is also now expected during Wednesday’s session, accelerated from Thursday, as initially planned,, sources note. Bookrunners are J.P. Morgan, Bank of America Merrill Lynch, Citi, Deutsche Bank, Goldman Sachs, HSBC, Morgan Stanley, UBS, and Wells Fargo.

Proceeds of the 144A/Reg S-for-life bonds will be used for general corporate purposes.

New York–based WeWork provides workspaces, community, and services for customers that range from entrepreneurs, freelancers, startups, artists, small businesses, and divisions of large corporations.

Analysts at S&P Global Ratings have assigned B+ and 2 recovery ratings to the deal, as well as a B corporate rating. S&P Global Ratings has a stable outlook for the issuer.

Fitch today assigned a BB– issuer rating to WeWork and the proposed unsecured issue, with a stable outlook. In its report, the rating agency noted the company’s existing debt includes a $650 million revolving credit facility and $500 million letter of credit reimbursement facility, which matures on Nov. 12, 2020. — Jakema Lewis

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US Leveraged Loan Issuance Tops $20B

leveraged finance issuance

It was a busy week in the U.S. leveraged loan market, with new-issue activity totaling $20.5 billion, according to LCD.

While that’s a hefty figure, $5 billion of that amount is in the form of a revolving credit – as opposed to a more richly-priced institutional term loan – part of a debt package backing the merger of the Albertsons supermarket group with the Rite Aid pharmacy chain.

Year to date, U.S. leveraged loan volume totals $207 billion, $154 billion of which are institutional term loans. – Staff reports

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Netflix Investors Binge on High Yield Offering After Increase to $1.9B

Netflix (Nasdaq: NFLX) has placed $1.9 billion of 10.5-year bullet notes at the mid-point of guidance, sources said. Joint bookrunners for the deal, which was completed with a $400 million upsize and serves as the borrower’s largest bond print, were Morgan Stanley, Goldman Sachs, J.P. Morgan, Deutsche Bank, and Wells Fargo. All proceeds will be used for general corporate purposes. Today’s tap comes shortly after the streaming services powerhouse on April 11 scored one-notch corporate and unsecured ratings upgrades to Ba3 from Moody’s, on expectations for continued strong momentum of global subscriber and revenue growth for the intermediate-term, and that 2018 will be the negative cash flow trough for the company.

Meanwhile, analysts at S&P Global Ratings today said that “pro forma for the debt issuance, the company’s adjusted leverage will remain about 4.1x (as of March 31, 2018),” and that it expects the company’s adjusted leverage to increase slightly to the low- to mid-4x area as it continues to rely on debt issuance to invest heavily in content in 2018. Netflix had last accessed the market in October 2017, when it placed $1.6 billion of 4.875% notes due 2028. – Jakema Lewis

Issuer Netflix
Ratings B+/Ba3
Amount $1.9 billion
Issue Senior (144A/Reg S-for-life)
Coupon 5.875%
Price 100
Yield 5.875%
Spread T+291
Maturity Nov. 15, 2028
Call non-call life
Trade April 23, 2018
Settle April 26, 2018 (T+3)
Joint bookrunners MS/GS/JPM/DB/WF
Price talk 5.75-6%
Notes Upsized from $1.5 billion; make-whole @ T+50; change of control put @ 101

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Free Webinar: 1Q 2018 US/Europe High Yield Analysis (Fridson)

LCD/S&P Global Market Intelligence’s webinar detailing the First-Quarter 2018 High Yield Markets is now available to view, on-demand.

This complimentary presentation features analysis from Marty Fridson of LCD and Lehmann, Livian, Fridson Advisors, along with John Atkins, Luke Millar, and Ruth Yang of LCD.

You can view the webinar here.

In this quarter’s presentation:

  • Treasury yields rise while high yield sinks
  • High yield upholds hybrid reputation
  • High yield returns favor shorter maturities
  • Better-rated credits underperform
  • High yield outperforms vs better-quality comps
  • In the red: a look at industry returns
  • US high yield volume, pricing
  • Europe high yield volume, LBO activity
  • Spreads, Europe vs US

LCD presents these high yield market updates each quarter.

The charts used in the presentation are available for download.

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US High Yield Funds See Hefty Retail Investor Cash Inflow

us high yield flows

Riding the current broad rally across the speculative grade bond markets, U.S high-yield funds saw a $989 million net inflow from retail investors during the week, the first significant inflow for the asset class since the second week of January, according to Lipper.

ETFs did the heavy lifting, netting $771 million—this is the second straight week that ETFs saw an inflow—while funds proper saw a $217 million inflow, according to Lipper.

The four-week average narrowed to a $344 million outflow, from a $589 million outflow last week.

The change due to market value was a hefty $1.39 billion.

Despite this week’s activity, U.S. high yield funds and ETFs have seen a net $15 billion outflow in the year to date.

Total assets now stand at $204.5 billion; $44.9 billion from ETFs, according to Lipper. — Tim Cross 

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US High Yield Bond Funds See $620M Cash Outflow

us high yield funds

U.S. high-yield funds recorded an outflow of roughly $619 million for the week ended March 28, according to weekly reporters to Lipper only. The exit follows last week’s outflow of roughly $1.2 billion. The total outflow so far this year is now $15.5 billion.

Prior to a roughly $11 million inflow for the week ended March 14, U.S. high-yield funds endured a record high-yield outflow streak of $16.6 billion over an eight-week period.

Mutual funds drove the bulk of this week’s exit, with an outflow of $527 million, while roughly $92 million was pulled from ETFs.

The four-week trailing average narrowed to negative $577 million, from negative $598 million last week.

The change due to market conditions this past week was a decrease of $628 million. Total assets at the end of the observation period were about $199.3 billion. ETFs account for about 21.8% of the total, at $43.5 billion. — James Passeri

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GCP Applied Tech Slashes Borrowing Cost Via $350M High Yield Offering

GCP appliedGCP Applied Technologies (NYSE: GCP) today placed a $350 million high yield bond offering, pricing the deal at 5.5%, a significant savings for the construction products technologies company.

The deal was led by bookrunners Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs, Citi, PNC, and KeyBanc Capital Markets. Existing unsecured ratings are BB–/B1.

The borrower intends to use the proceeds from the new print, along with up to $50 million of borrowings under its credit facility and cash on hand, to redeem its $525 million of existing 9.5% notes due 2023. Proceeds may also be used for general corporate purposes.

Analysts at S&P Global Ratings expect that, post today’s transaction, GCP Applied’s debt levels represent roughly a 50% reduction in book debt, compared with June 2017 levels. This is also partly due to the company paying down its debt with a portion of the proceeds from the $1.05 billion sale of its Darex Packaging Technologies segment to Henkel, completed in July 2017.

In August 2016, GCP completed a $275 million repriced B term loan (L+325, 0.75% LIBOR floor).

Structure for today’s pitch includes an issuer-friendly first call, at par plus 50% of the coupon. The equity clawback will be for up to 40% at par, plus the coupon during the non-call period.

Cambridge, Mass.–based GCP Applied Technologies produces and sells specialty construction chemicals and specialty building materials worldwide. — Jakema Lewis

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