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Bond Market Smackdown: SolarCity vs. Sri Lanka

Aug 24, 2016
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The raging bond bull market evidently has its limits. That is a problem for SolarCity, and quite possibly Tesla Motors shareholders.
SolarCity said Tuesday afternoon that Chairman Elon Musk, Chief Executive Lyndon Rive and technology chief Peter Rive would together purchase more than 80% of the solar energy company’s latest $124 million bond issue. The bonds will pay an annual interest rate of 6.5% and mature in 18 months.
That interest rate appears high given the global demand for yield. Some emerging-market sovereign debt now trades in line with investment-grade global corporate bonds. Sri Lanka, for instance, was able to issue 10-year bonds at a 6.825% annual rate last month. Intermediate-term U.S. corporate bonds yield 2.21%.
Granted, significant insider purchases of SolarCity bonds aren’t new. Mr. Musk’s private company, Space Exploration Technologies, bought the vast majority of a $105 million issue earlier this year. Mr. Musk told The Wall Street Journal in April that the large insider purchases of bonds are consistent with his philosophy that he should invest in securities his companies offer to the general public. And to a point, that is a reasonable approach.
But SolarCity has never offered such a high coupon on its debt for such a brief maturity. In February, the company issued five-year bonds with a coupon payment of just 5.25%.
The higher cost of borrowing has coincided with a 50% decline in SolarCity’s share price this year.
Higher interest costs should alarm Tesla’s investors, who will inherit SolarCity’s obligations if a proposed merger with Tesla wins shareholder approval. Just as ominous is that it looks like outside investors aren’t willing to buy up SolarCity’s debt, despite the higher yields.
Given the bullish global backdrop for bonds, a company offering an interest rate as high as 6.5% on such a short maturity should be beating investors back, if all were well.Tesla shareholders ought to keep that in mind as they weigh whether to approve bringing SolarCity in house.

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