Tesla will leverage local debt to fund $2 billion Shanghai Gigafactory

Tinuku - Tesla Inc said on Wednesday that it would raise capital from Asian debt markets to fund the construction of its third Gigafactory which will be build in Shanghai and cost an approximate US$2 billion. In the electric vehicle maker’s second-quarter earnings statement, CEO Elon Musk said that he expected much of the car assembly plant to be “funded through local debt.”

“For China I think our default plan will be to use essentially a loan from local banks in China and fund in Shanghai with local debt,” says Musk.

Tinuku Tesla will leverage local debt to fund $2 billion Shanghai Gigafactory

The carmaker said in July that it had agreed with the Chinese government to manufacture vehicles in Shanghai, the first of its so-called Gigafactories to be built outside of the United States. The capital expenditure cost of Gigafactory 3 is estimated to be US$2 billion.

Tesla will need to raise debt because manufacturing challenges have left the company with a shortage of cash. Musk is turning to Asian markets because it is unlikely he would have been able to secure the sort of favorable terms from U.S. bond investors he did for his US$1.8 billion junk bond, issued in 2017 with a 5.3 percent coupon.

Tesla has been burning cash as manufacturing problems have been thwarting its ability to meet production targets for its Model 3 sedan. The company on Wednesday said it would build up to 55,000 Model 3s in the current quarter at a positive gross margin, buoying hopes that it may meet its goal of profitability and positive cash flow in 2018.

The company ended the second quarter with US$2.78 billion in cash after spending $610 million in capital expenses, while its negative free cash flow narrowed. Musk said vehicles produced at Gigafactory 3 would enable Tesla to meet Chinese demand.

The first cars are expected to roll off the production line in about three years, with construction beginning in the “next few quarters.” Initial investment will not start in any significant way until 2019.