- SpaceX, one of Tesla CEO Elon Musk’s major business ventures, tapped the risky leveraged loan market.
- The $250 million deal received a mixed reception from investors given SpaceX’s cash burning history.
- The company previously relied on private equity funding but now follows Tesla in tapping debt markets.
Elon Musk is loving high yield debt.
SpaceX took a leveraged loan worth $250 million on Monday, having initially sought to borrow as much as $750 million, according to numerous reports. The smaller loan was taken as a result of deteriorating credit conditions during the fundraising period.
Bank of America led the financing which will help fund SpaceX’s push into sending astronauts into space and eventually humans to Mars. The loan had previously been led by Goldman Sachs, who helped take Tesla public, before rejected the proposed terms regarding future debt funding.
Previous private equity funding valued SpaceX at more than $20 billion, but loan investors were wary of the company’s record of burning cash as it seeks to expand its operations.
The leveraged loan market has expanded dramatically in recent years into a $1.6 trillion industry. Doubts have been raised about the quality of these deals by former Federal Reserve chair Janet Yellen and the IMF this year as companies pile on more and more debt.
Another of Musk’s companies, Tesla, also tapped the high yield market earlier this year. Other major tech companies Netflix, Uber, and WeWork have also expanded into leveraged financing in the past 18 months.
Space X’s seven-year loan was issued at 99 cents on the dollar with a coupon of 4.25% — a higher interest rate than previously expected. Investors committed $750 million forward for the loan, suggesting interest was still strong in providing funding despite renewed concerns about leveraged loans, although SpaceX eventually took the smaller amount.
The S&P/LSTA Leveraged Loan Index saw the average price of loans fall 0.3% in the past week indicating investors see the product as more risky.
Musk has become a controversial figure for investors due to his often volatile behaviour, according to the Wall Street Journal. The SpaceX chief executive, who is also CEO of Tesla, mocked the SEC earlier this year after it settled a lawsuit against him following a tweet claiming he had secured funding to take Tesla private.
SpaceX’s current business model involves sending commercial and government satellites into space. However it’s opportunities could be diminished following news that NASA, which has contracted the company to fly astronauts to the International Space Station, will launch a safety review of the company, according to the Washington Post.
Earlier this year, SpaceX was shut out of a U.S. Air Force contracts worth more than $2 billion to develop boosters for US military and spy satellites in the mid-2020s.
Musk’s company is planning to launch thousands of satellites to cover the Earth with internet access while SpaceX has also introduced a larger rocket, called BFR, in 2016 with test flights set to begin next year.