Tesla will tap local debt to fund $2 billion Shanghai Gigafactory: Musk

NEW YORK (Reuters) - 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 located in Shanghai and cost an approximate $2 billion.

FILE PHOTO: SpaceX founder Elon Musk pauses at a press conference following the first launch of a SpaceX Falcon Heavy rocket at the Kennedy Space Center in Cape Canaveral, Florida, U.S., February 6, 2018. REUTERS/Joe Skipper/File Photo

In the electric vehicle maker’s second-quarter earnings statement, published after the market close, Chief Executive Elon Musk said that he expected much of the car assembly plant to be “funded through local debt.”

On the conference call following the earnings release he said: “For China I think our default plan will be to use essentially a loan from local banks in China and fund the (Gigafactory) in Shanghai with local debt.”

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 $2 billion, Musk said on the conference call.

Tesla will need to raise debt because manufacturing challenges have left the company with a shortage of cash. Analysts said they believed 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 $1.8 billion junk bond, issued in 2017 with a 5.3 percent coupon.

“Given the Chinese new energy vehicle laws in place, I would expect the terms of the debt to promote an electric vehicle factory and battery factory to be more accommodating than the U.S. markets right now,” said Jeffrey Osborne, managing director, sustainable energy and industrial technology at Cowen Inc.

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.

Tesla ended the second quarter with $2.78 billion in cash after spending $610 million in capital expenses, while its negative free cash flow narrowed.

Vehicles produced at Gigafactory 3 would enable Tesla to meet Chinese demand, said Musk in a letter to investors on Wednesday. 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, he added.

Reporting by Kate Duguid and Alexandria Sage, Editing by Rosalba O’Brien