Tesla 5.3% Bonds Could Be Redeemed Early, Investors Take Note

If you’re holding Tesla 5.3 percent bonds, take note. Reportedly, Tesla plans to redeem the bonds earlier than expected.

The news about the early bond redemption was reported July 21 by the website Seeking Alpha. Bill Cunningham, one of the website's writers, is a Tesla bondholder. Cunningham received the notice through his brokerage.

In August 2017, Tesla issued $1.8 billion in bonds at a 5.3 percent yield that was to be due August 15, 2025. A provision of the bonds allows the company to redeem them early but at a premium to face value, reports Cunningham.

So, by redeeming the bonds early, Tesla will have to pay almost $48 million over the face value of the bonds. The company will save over $95 million in interest over the next four years, Cunningham reports.

“I am confident that Tesla can borrow $1.8 billion of unsecured debt due in 2025 at a considerably lower rate than the 5.3 percent it is currently paying if it decides it wants to maintain its cash balance or may have a need for it,” Cunningham wrote.

Investors welcomed news of the early redemption on Twitter.

“Assuming TSLA continues to execute this year (achieve earnings and cash flow targets), this should bring TSLA one step closer to its goal of being an investment-grade credit,” tweeted Gary Black, managing partner at The Future Fund LLC.

“#Tesla has collected enough cash to pursue the maximum expansion for which it has enough management capacity and enough engineering capacity. So why should it pay 5.3% interest on bonds it used to expand Freemont and Nevada when it has long since earned that money from those,” tweeted Claus Ableiter.

Tesla has a history of using bonds to help finance its growth. The electric car company has four outstanding bonds. Tesla first issued convertible bonds in 2013 with $600 million worth. That was followed by $2 billion in bonds in 2014, $850 million in 2017, and $1.6 billion in 2019.

Convertible bonds can eventually be converted into stock shares. They are commonly used by non-investment grade, high-growth companies to raise funds.

The 5.3 percent yield bonds issued in 2017 were traditional and not convertible bonds. Traditional bondholders don’t have the option to trade the bond for stock shares.

The Tesla bonds issued in 2014 reached their maturity in March at a gain of over 800 percent, Forbes reported. The 5.3 percent bonds issued in 2017 have the longest maturity at 2025.

In September 2020, bondholders of the Tesla 5.3 percent yield bonds got good news when the price for those bonds reached a record 104.36 cents on the dollar. The increase came after the company announced plans to sell up to $5 billion in stock.

Tesla representatives might provide more information on the possible early redemption of the Tesla 5.3 percent bonds at its upcoming webcast on July 26. At that webcast, the company plans to releases its financial results for the second quarter of 2021.