In the midst of a significant strike affecting the automotive industry’s “Big 3” players, Tesla is making headlines with a bold move. A recent report indicates that the electric vehicle giant is exploring a substantial lease securitization endeavor, aiming to secure funding on an unprecedented scale.
Tesla has commenced its outreach to potential investors, seeking participation in a lease securitization venture valued at a staggering $1.8 billion. This revelation stems from marketing materials and insights from Fitch Ratings, as reported by MarketWatch (via Not a Tesla App). The implications of this move could potentially infuse Tesla with a billion dollars or more in liquid capital, depending on the response from financiers and the potential for an increase in bond class sizes.
What is Lease Securitization?
Lease securitization is a financial process wherein Tesla aggregates $1.8 billion worth of automotive leases, bundling them into bonds to entice investors. It can be likened to obtaining an upfront cash infusion from these leases rather than waiting for incremental revenue from customer lease payments. This strategic approach could present Tesla with an alternative funding channel distinct from the conventional corporate bond market.
MarketWatch reports that this solicitation aims to attract investment in approximately $1 billion worth of notes, subsequently divided into five bond classes, ranging from Triple A to Double A. The marketing materials reviewed by the publication suggest that the higher-rated tranches will be promoted for sale, while the lower-rated tranches will not be offered to investors.
Tesla’s CEO, Elon Musk, has not been reticent about his concerns regarding the Federal Reserve’s interest rate hikes. Nonetheless, as highlighted by Not a Tesla App, Tesla may leverage these interest rate increases to its advantage when selling securitized leases. By utilizing the funding generated, Tesla could potentially offer consumers shorter lease terms, a strategic move that aligns with changing economic conditions.
Tesla’s history includes previous instances of lease securitization, where investors received coupons ranging from 5.6 to 6.4 percent in a similar bond deal in July. In another auto lease bond sale in 2021, the return for investors was a mere 0.16 to 1 percent, underscoring the significant rise in borrowing costs tied to the Federal Reserve’s interest rate adjustments. In the current securitization process, prime borrowers are facing a weighted average interest rate of 5.06 percent, surpassing a prior securitization round earlier in the year, where borrowers paid 4.9 percent.
It’s important to note that the pricing of this transaction will not be finalized until the upcoming week, and as of now, Tesla has not provided an official response to MarketWatch’s inquiries.