Tesla Inc (Nasdaq: TSLA) announced plans for a major $1.5 billion senior note bond offering on Monday, giving investors an alternative to TSLA stock, which is famously volatile. For long-term investors looking for a safer way to invest in Tesla than buying its shares, Tesla corporate bonds provide a much lower-risk alternative.
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Corporate bonds are essentially loans that investors make to a company to help pay for the company’s expenses. In Tesla’s case, the money raised from the sale of its new senior notes will help the company pay for the costs associated with scaling up production of the Model 3, the company’s first mass-produced, affordable all-electric vehicle.
With so much of Tesla’s future dependent on the success of the Model 3, this $1.5 billion injection is vitally important to the company.
Companies like Tesla pay their bond holders interest on their investment. The interest rate of corporate bonds varies along with the risks associated with the bonds. Tesla didn’t specify the interest rate the company will pay on its new senior notes. According to credit rating agency Moody’s, the average yield on seasoned corporate bonds is about 4 percent.
While the TSLA stock price is tied directly to the market valuation of the company, which fluctuates on a daily basis, bond holders are guaranteed to receive their full principle as well as all interest owed if they hold until the bond’s maturation date. However, if a company declares bankruptcy or defaults on its debt, bond investors may not receive their entire payment. Even in the event of a bankruptcy liquidation, senior debt is given top priority over unsecured junior debt.
While no investment is 100 percent safe, bonds offer Tesla investors a way to mitigate much of the risk associated with the polarizing stock. While Tesla has tremendous potential as a company, even Wall Street experts can’t agree where TSLA stock is headed next. Of the 25 Wall Street analysts that cover Tesla stock, eight have “buy/overweight” ratings, 10 have “hold” ratings and seven have “sell/underperform” ratings. Price targets range from as high as $464 to as low as $155, according to CNN.
Unfortunately, Tesla’s new senior notes will not be available to most average American investors, at least not initially. The company said the notes “will be offered only to qualified institutional buyers,” including investment banks and hedge funds.
[Read: Why High-Yield Bonds Belong in Your Portfolio.]
Investors interested in purchasing other Tesla bonds can buy them in most brokerage accounts, typically in multiples of $1,000. Investors who intend not to hold their bond investments until maturity should understand that bond values and yields fluctuate on a daily basis, and selling bonds prior to maturity can potentially result in large losses.
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There’s a New Way to Invest in Tesla originally appeared on usnews.com
