Telsa has announced its decision to pause a $1 billion asset-backed security sale in the midst of market turmoil, even as the stock continues to gain.
Tesla’s (ticker: TSLA) stock rose 2.3% to $858.14 in premarket trading, which seems to follow the trend as U.S stock futures perform lower as well. S&P 500 and Dow Jones Industrial Average futures are both in a dip of about 0.3%. Nasdaq futures are down by 0.4%.
According to Bloomberg, the bond sale was paused as a result of short-term interest rates rising. Rising rates have the effect of making bond financing more expensive. Important to note is the fact that this bond sale isn’t a traditional debt. It’s an asset-backed security backed by car leases.
Most car companies utilize the asset-backed market to fund their automotive financing. Any car manufacturer can keep automotive lease receivables on its balance sheet or package them for investors. Ford Motor (ticker: F), for example, has tens of billions of financing receivables on its balance sheet, while Tesla only has a few billion dollars.
In looking at the sources of capital available for car companies, most need asset-backed markets as one of the sources of capital to run their businesses. Without asset-backed financing, a company would have to risk using its own balance sheet to fund leasing.
Despite the deal flop, the disruption to Tesla looks negligible in light of the figures; the bond deal was only $1 billion in size, but Tesla ended the year with over $18 billion on its balance sheet. Furthermore, Tesla is expected to generate roughly more than $15 billion in cash flow in 2022, even before its capital spending, a rise from the $12 billion generated in 2021.
Although investors care a lot about interest rates, their main concern is how these rates will affect Tesla’s valuation. Rising rates can have the effect of hurting growth stock valuations more than others. This is because growth companies generate most of their earnings far into the future, making those earnings worthless in the current time’s currency when discounted back at higher rates.
Tesla started the year trading at roughly 13 times its 2021 performance. Currently, it’s trading at about 10times that figure. Rising rates are a partial explanation for the decline, with its shares down 22% year to date.