NEW YORK (Reuters) - Bond investors on Friday were poised to give a $1.8 billion boost to Tesla Inc's balance sheet by snapping up the electric car maker's first foray into the U.S. junk bond market, where yield-hungry investors have raced to lock in relatively higher returns.
Those robust returns, however, have shrunk as a strong reservoir of cash ready to deploy in the riskiest areas of the high-yield fixed income market has pushed them to near their lowest levels in three years. That's given junk-rated issuers such as Elon Musk's U.S. car company the opportunity to raise cash cheaply.
For Tesla, cash raised from the bond issue will help finance production of its Model 3, on which it is banking to hit the mass market bullseye.
"It's a milestone for a company from a relative unknown to what it is today," said David Knutson, head of credit research at Schroders Investment Management.
Palo Alto, California-based Tesla was set to sell $1.8 billion of eight-year unsecured bonds at a yield of 5.25 percent, more than the $1.5 billion originally intended because of overwhelming demand, according to IFR, a Thomson Reuters unit.
The company, founded by Musk in 2003, has yet to book a profit. Musk has plowed revenues back into his businesses, where he has expanded into energy storage.
The ability of the high-yield sector, which some analysts and investors consider pricy, to absorb debt supply from a first-time issuer such as Tesla suggests its resilience, at least for now.
"I won't call it a bubble," said Andrew Feltus, co-head of high yield and bank loans at Amundi Pioneer Asset Management in Boston. "The (market) fundamentals are pretty good."
Standard & Poor's assigned a B-minus on Tesla's junk bond issue, while Moody's Investors Service rated it B3.
ALONG FOR THE RIDE
Despite lingering skepticism, there has been no shortage of funds to fuel Tesla's ambition to popularize electric cars.
Investors who jumped on the bandwagon have been rewarded.
Tesla has raised $3.3 billion in convertible bonds, which have performed well, in step with its stock.
The stock ended up 0.7 percent at $357.72 on Friday, a near 1,400 percent increase since its debut in June 2010 at $17 a share.
Tesla might have picked just the right time to become a junk bond issuer.
Investors have jumped on new supply as defaults are expected to remain low, with the economy growing at a modest pace with little inflation.
"There is a lot of liquidity in the market. There's, on average, adequate compensation for investors," said Robert Tipp, chief investment strategist at PGIM Fixed Income.
Investor appetite has driven the average yield on U.S. B-rated corporate bonds to 5.7 percent late this week, down 0.36 percentage point since the end of 2016 and below its recent peak of 10.18 percent in February 2016, according to Bank of America Merrill Lynch.
The benchmark 10-year Treasury yield, in contrast, was 2.19 percent after hitting a six-week low earlier Friday.
Additional reporting by Nick Carey in Detroit; John Balassi, Paul Kilby and Will Caiger-Smith at IFR; Editing by Daniel Bases and Dan Grebler