The draw of the Tesla brand, and the reputation of its founder Elon Musk, made the deal highly attractive to many investors, sources said on Thursday.
Citi and Deutsche Bank led the $546.1m deal, with the $422.6m ‘A’ notes being priced at 30bp over eurodollar spot forward. The $40.1m ‘B’ notes were priced at 50bp over EDSF, while the $27.9m ‘C’ notes were priced at 70bp over. The $23.7m ‘D’ notes were priced at 100bp over EDSF while the $31.6m ‘E’ notes came in at 265bp over interpolated swaps.
The pricing is slightly wider than on a securitization from Mercedes in January, but an ABS investor indicated that this was more likely a function of Tesla being a new face in the auto ABS market.
The deal first made a splash last week, when the company filed deal documents with the Securities and Exchange Commission. Despite being multiple times oversubscribed in the days leading up to pricing, some sources speaking to GlobalCapital voiced doubts about the strength of the deal.
“Everything with a Tesla name gets a lot of attention. Nobody’s even sure if the company can grow into their valuation on the equity side, but if there is Elon Musk’s name on it, there will be definitely be hype,” said one skeptical ABS investor.
“This is also the first transaction solely backed by electric vehicles. We have concerns about the residual risk in that deal. The underlying borrowers may have great credit, but the Tesla cars are still fairly new so we don’t really know what the aftermarket would be for a used Tesla vehicle,” he added.
A second investor added that a successful securitization program with collateral familiar to ABS investors could be a boon for the company, which has been grappling with difficulties in producing its mass market Model 3 vehicle, in addition to mass layoffs at its SolarCity subsidiary.
“I think everyone is curious about the deal — anecdotally people have been pretty cultish about these vehicles so we expect to see very good performance. Institutionally, Tesla has many challenges but if their ABS program goes well, that would be a positive for the company,” the second investor said.
Sources also said on January 26 that the market had long expected the electric car maker to tap the capital markets for funding, after it rolled out two solar securitzations from the Tesla shelf at the end of last year. The two deals were backed by solar leases and power purchase agreements (PPAs) issued by SolarCity, which Tesla acquired in November 2016.
The deal is backed exclusively by leases on Tesla vehicles. Leases on the Model S sedan comprise 68% of the pool, while leases on the Model X SUV makes up the remainder, according to a presale from Moody’s. The weighted average FICO of borrowers is 767, which is higher than most auto lease deals from Ford and Nissan, but lower than the weighted average score of 780 on deals from BMW and Mercedes.