Tesla Plans to Raise More Financing for New Leasing Unit

Apr 09, 2014 4:25 pm ET

(Updates with closing share price in the sixth paragraph.)

April 9 (Bloomberg) -- Tesla Motors Inc., which raised $2.3 billion in a convertible note sale last month, plans to find more funds for the new finance unit it’s created to lease electric Model S sedans to business customers.

Leases issued by the Tesla Finance unit “will be funded with a combination of equity and a warehouse financing facility that will be announced shortly,” the carmaker said on its website yesterday. Jeff Evanson, the Palo Alto, California-based company’s vice president of investor relations, declined to provide details on the capitalization of the new subsidiary.

“A captive finance company is a natural extension of our strategy to offer great customer experience, including financing products important to customers,” the company said. “Tesla Finance will offer a financing product that customers have been requesting” and has not been available “from our bank financing partners: a true leasing product intended for businesses.”

The carmaker led by Elon Musk wants to boost production by 56 percent this year as exports to China begin and the brand expands in Europe. Tesla’s plan to push into business leasing, also announced yesterday, makes sense for the Model S, priced from $71,000, said Craig Irwin, an analyst with Wedbush Securities.

“A large portion of luxury vehicles in the U.S. are leased, and it’s not surprising to see Tesla start with business leasing,” Irwin said in an e-mail. He rates the shares the equivalent of a buy.

Tesla rose 0.7 percent to $216.93 at the close in New York. The stock has gained 44 percent this year.

Warehouse Financing

Warehouse financing typically refers to loans made to manufacturers and processors that rely on goods or commodities as collateral.

Tesla said it will use some of the cash it generates from Model S sales to fund the unit. Given a “solid cash position, strong cash flow from operations and the poor returns available on cash equivalents,” using some for Tesla Finance “makes sense,” the company said.

Should the business lease program grow, “additional layers of warehouse facilities would be added and eventually replaced with private and/or public asset-backed securitization transactions commonly utilized in the industry,” Tesla said.

The carmaker named for inventor Nikola Tesla said it will include a supplemental quarterly and year-to-date table summarizing the aggregate price of vehicles leased.

“This should allow investors to evaluate the velocity of our vehicle business,” the company said.

The business leasing program will have “no material impact to our gross margin in either GAAP or non-GAAP financials,” Tesla said.

Business Leases

Tesla began offering lease-style financing for individuals in April 2013 through a partnership with U.S. Bancorp and Wells Fargo & Co.

Tesla’s business lease program is targeting small and medium-sized businesses. Corporate customers can calculate the cost of leasing as they configure the car on Tesla’s website. Tesla Finance will offer loans from partner banks in addition to a resale-value guarantee available under the current program.

“These kinds of business leases are offered as a perk to vice presidents, company directors, C-level managers,” said Alec Gutierrez, an industry analyst for Kelley Blue Book in Irvine, California. Bayerische Motoren Werke AG’s BMW and Daimler AG’s Mercedes-Benz actively promote them, “and it’s a good market for Tesla to go after,” he said.

The company announced in February a sale of convertible notes intended to raise $1.6 billion. The total grew to $2.3 billion, Evanson said in an April 3 e-mail.

The proceeds will be used for its planned battery factory, model development and “to accelerate the growth of its business in the U.S. and internationally,” the company said in a statement.