Tesla Prepares Largest-Ever EV Lease Bond Deal Amid Surging Luxury Consumer Confidence

Despite concerns of rising interest rates from the Federal Reserve, Tesla (TSLA) drivers remain undeterred. The electric vehicle giant initiated discussions with prospective investors for a groundbreaking $1.8 billion securitization of its electric vehicle leases, marking its largest offering since starting them in 2014, as per Fitch Ratings and early marketing materials.

This significant financing move showcases Tesla’s plan to entice investors with approximately $1 billion of notes, divided into five bond classes rated between Triple A and Double A. Meanwhile, lower-rated portions won’t be up for sale, based on the preliminary materials reviewed by MarketWatch.

Such a strategy allows Tesla to reinvest in more leases, offering an alternative financial resource apart from the regular corporate bond market. Tesla’s stock appreciated 1.8% on Thursday, showing an impressive year-to-date increase of 124.1%, according to FactSet. Previous Tesla bonds from July offered returns between 5.6% and 6.4%. In contrast, 2021 bonds, during nearly zero Fed rates, had returns ranging from 0.16% to 1%, as Finsight data indicates. With the uptick in interest rates, corporate borrowing expenses have surged. If demand for these bonds intensifies, Tesla might consider enlarging its bond classes, leading to greater financing for the company. The final pricing of this transaction is anticipated next week. Requests for comments from Tesla remain unanswered.

This considerable transaction size aligns with recent data, indicating that U.S. consumers are holding steady, even with the Federal Reserve’s assertive rate hikes since the previous year. However, increased borrowing costs seem to impact subprime borrowers more severely.

Jen Ripper, a securitized product investor at Penn Mutual Asset Management, expressed a preference for shorter-term bonds supported by prime borrowers, especially with looming student debt repayments and households’ increasing leverage from the pandemic’s aftermath.

She commented on Thursday, highlighting the climb in both consumer debt amounts and their respective interest rates.