SpaceX Launches First Loan -- Update
November 20 2018 - 9:01PM
Dow Jones News
By Sam Goldfarb and Andy Pasztor
Elon Musk's SpaceX raised $250 million from its first-ever
high-yield loan sale, shrinking the size of the loan by $500
million after the company encountered a mixed reception from
investors and worsening credit-market conditions.
The loan, facilitated by Bank of America Corp. and slated to
fund general corporate purposes, opens a new avenue for fundraising
for SpaceX as it looks to pay for massive projects demanding many
billions of dollars over the next few years.
Based in Hawthorne, Calif., SpaceX makes money by launching
commercial and government satellites but has larger ambitions to
send astronauts into orbit and eventually to carry humans to Mars.
It has previously relied on private-equity funding that valued the
company at more than $20 billion.
SpaceX marketed its loan only to a select group of
investors.
Some investors who were offered the loan expressed misgivings
about the company's record of burning through cash and its
experience with high-profile accidents, which have previously led
to dips in revenue. Other concerns include the company's large
investment plans and its connection to Mr. Musk, the founder and
chief executive of SpaceX, whose volatile behavior has led to
turmoil at the electric-car maker Tesla Inc., where he also is
chief executive.
Still, the loan intrigued some, based in part on SpaceX's lofty
equity valuation, which implies its assets are worth more than its
debt. SpaceX also holds a prominent position in a business with
high barriers to entry.
Doug Wooden, a senior analyst at DDJ Capital Management, said
DDJ had been interested in buying the loan based on the value of
SpaceX's core business. The firm passed on the debt only after it
was shrunk to $250 million, because that promised to make it harder
to trade in the secondary market, he said.
The environment for issuing new bonds and loans has deteriorated
in recent weeks, making SpaceX's debt sale more difficult. Demand
for loans has generally outpaced other fixed-income assets because
their variable-rate coupons rise as the Federal Reserve lifts
benchmark interest rates. Even so, the average price of loans in
the S&P/LSTA Leveraged Loan Index has dropped by 0.3 percentage
point over the past week to 97.7 cents on the dollar as of Monday,
according to LCD, a unit of S&P Global Market Intelligence,
indicating investors see greater risk in the asset class.
The SpaceX loan was issued late Monday at 99 cents on the dollar
with a coupon of 4.25 percentage points above the benchmark London
interbank offered rate. That was at the high end of original
guidance.
In a gesture to investors in the late stages of the debt sale,
SpaceX tweaked certain terms, generally making it likelier that the
company will be on solid financial footing before it does things in
the future like issue more debt or make certain investments.
Despite shrinking the size of the loan, Bank of America received
more than $750 million in orders from investors for the debt,
according to a person familiar with the situation -- enough to sell
the loan at its original size. SpaceX decided to go with the
smaller loan because it is comfortable with its cash-generating
ability, the person said. Issuing less debt could also make it
easier for SpaceX to revise the terms of the loan later if market
conditions improve, investors noted.
SpaceX's existing businesses currently take in revenue of about
$2.5 billion a year, according to industry officials. Profit
margins are constrained in part by a payroll of some 7,000
employees, the cost of operating three launchpads and expenditures
for developing a fourth site. In years when has suffered rocket
explosions, SpaceX has lost money.
Mr. Musk and his team are pushing ahead with a
multibillion-dollar plan to launch more than 7,000 small
communication satellites into low-earth orbit. Another part of the
company is proposing to spend many times that sum over the next 10
to 20 years to develop and test the BFR, a mammoth rocket and
capsule larger than any built before, to transport people to
Mars.
Over the years, Mr. Musk has talked about the importance of
maintaining focus on Mars exploration and said such ambitious goals
wouldn't be supported if the company went public or if his
controlling stake was diluted. Now, though, according to some
industry analysts and aerospace industry officials, the loan
appears to be part of a shorter-term initiative to accelerate
development of a full-size version, or perhaps a smaller,
less-capable test, of what was formerly the BFR.
The loan activity comes as global demand for launching
commercial satellites is stagnant, and SpaceX is just beginning to
see its U.S. government business ramp up. There doesn't appear to
be any prospect, at least for the foreseeable future, of federal
dollars providing significant funding to help development of the
proposed giant rocket or planned small satellites.
Earlier this year, SpaceX was shut out in a U.S. Air Force
competition that awarded more than $2 billion in contracts to three
other rocket makers to develop various smaller boosters intended to
begin lifting U.S. military and spy satellites around the
mid-2020s.
--Soma Biswas contributed to this article.
Write to Sam Goldfarb at sam.goldfarb@wsj.com and Andy Pasztor
at andy.pasztor@wsj.com
(END) Dow Jones Newswires
November 20, 2018 20:46 ET (01:46 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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