Tesla prepares for $1.8 billion lease securitization: report

Key Points

• 🚗 Tesla plans to raise funding through a $1.8 billion lease securitization, amid a strike against the “Big 3” auto industry companies.
• 💰 The securitization involves grouping $1.8 billion worth of auto leases and selling them as bonds to investors, providing Tesla with a significant cash influx.
• 📊 Tesla aims to attract interest from investors for approximately $1 billion in notes, divided into five bond classes, with varying credit ratings.
• 📈 Interest rates for the current securitization stand at 5.06%, reflecting an increase compared to a previous round earlier in the year.
• 💡 Tesla may use the proceeds to offer shorter lease terms to consumers and potentially benefit from Federal Reserve interest rate hikes.
• ⏳ The pricing of the securitization will be determined next week, and Tesla has yet to comment on the matter.
• ⚙️ This development occurs against the backdrop of labor strikes by the UAW against major automakers, including Ford, GM, and Stellantis.

A new report shows that Tesla is looking to generate funding from its biggest lease securitization yet, just a few days into a major strike against the auto industry’s “Big 3.”

Tesla began calling for potential investors this week for a $1.8 billion securitization of its vehicle leases, according to marketing materials and Fitch Ratings seen by MarketWatch (via Not a Tesla App). The move could generate around a billion dollars in liquid cash, and maybe more if bankers decided to increase bond class sizes.

WHAT IS LEASE SECURITIZATION?

The securitization process essentially means that Tesla will group together $1.8 billion worth of auto leases to be sold off as bonds to investors. It can be thought of as a cash advance from the leases instead of letting revenue come in little by little as customers pay for their cars. Ultimately, securitizing leases would provide Tesla with an alternative funding source beyond the corporate bond market.

According to MarketWatch, the call seeks to garner interest in around $1 billion of notes from investors, which will be split into five bond classes ranging from Triple A to Double A. The higher-rated tranches will then be marketed for sale, while the lower-rated tranches will not, according to the marketing materials seen by the publication.

Tesla CEO Elon Musk has also echoed warnings about the Federal Reserve’s interest rate increases several times in the past. However, as Not a Tesla App points out, Tesla may be able to use the interest rate hikes to its advantage with the sale of securitized leases by using the funding to offer shorter lease terms to consumers.

Tesla has initiated lease securitization in the past, paying out between 5.6 and 6.4 percent in coupons to investors in a similar bond deal in July. In another sale of auto lease bonds in 2021, investors were paid just 0.16 to 1 percent, depicting how much borrowing costs have jumped alongside the Fed’s interest rate hikes.

The current securitization process has prime borrowers paying a weighted average interest rate of 5.06 percent, which is more than a securitization round earlier this year in which borrowers paid 4.9 percent.

The transaction won’t be officially priced until next week, and Tesla hasn’t responded to MarketWatch’s request for comments.

The news comes amidst early strikes from the UAW facing the “Big 3,” Ford, General Motors (GM) and Stellantis. Earlier this week, Ford CEO Jim Farley said that the UAW’s wage proposals could bankrupt the automaker, though the union later responded on X by noting Farley’s $21 million salary in 2022.