Tesla's Unexpected Car Price Cut Sends Bonds Into the Tank

(Bloomberg) -- Tesla’s 2025 notes topped the list of biggest losers in U.S. high yield trading Wednesday after the electric-car maker said it was cutting U.S. model prices by $2,000.

The senior unsecured bond fell 2 points to 85.5 cents on the dollar and traded for as little as 85.125, according to Trace. That boosted the yield on the 5.3 percent notes to more than 8 percent. The issue, which has about $1.8 billion outstanding, was tied for second most-active in the U.S. high-yield market.

Tesla’s unexpected price cut was designed to offset shrinking federal tax credits for customers who buy its electric vehicles, and could cut into funds available to pay off its bills. The company simultaneously reported fourth quarter deliveries that fell just short of analysts’ expectations.

Tesla’s shares plunged as much as 10 percent during the day, finishing down 7 percent at $310.12. If the slump persists, it could raise questions about how Tesla will handle $920 million of convertible bonds scheduled to mature in less than 60 days, on March 1. Holders can swap the senior unsecured notes for 2.7788 common shares at just under $360 each -- a level that Tesla has breached for only three brief periods this past year.

Assuming the stock doesn’t rally back to that level in time, Tesla could have to refinance the notes, which pay interest of only 0.25 percent, or pay off the holders. The bonds were changing hands at more than 104 cents on the dollar as of Dec. 28.

Elon Musk, Tesla’s chief executive officer, has previously said during earnings calls that he intends to pay off the debt with internally generated cash flow. During the third quarter call on Oct. 24, Musk said he had no intention of raising equity or debt because he wanted to reduce the company’s overall debt burden.

“The current operating plan is to pay off our debts and not to refinance them,” Musk said on the call.

The conversion will be based on volume-weighted average prices for 20 consecutive trading days beginning on the 22nd day before maturity, according to the bond prospectus.

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