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Tesla files plans for inaugural auto-lease ABS issuance

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Tesla Inc. (Nasdaq: TSLA) is facing a large cash requirement as it ramps up production of its Model 3. It may have found a new source of funding: the asset-backed market.

The company filed preliminary plans with the U.S. Securities and Exchange Commission last week to issue bonds backed by leases on its electric cars. The ABS-15G filing indicates it is establishing a Tesla Auto Lease Trust with plans to issue an initial 2018-A series in a transaction underwritten by Citigroup, Deutsche Bank and Bank of America Merrill Lynch. The deal will pool both personal and commercial closed-end lease agreements.

There was no indication of the size of the pool of receivables or the amount of bonds to be issued.

Nearly all of Tesla's 250,000 vehicle deliveries since 2015 (through the third quarter of 2017) have involved its signature Model S passenger vehicle that debuted in 2012 and its Model X cross-over plug-in introduced in 2015. Both vehicles are aimed at the high-end market – the Model S sells for between $50,000 and $100,000.

Now the company headed by Elon Musk wants to go mainstream. Last summer, it introduced the Model 3, which starts at $35,000.

It’s considered a gutsy, and risky, move.

Tesla plans to produce 5,000 Model 3 vehicles a week and ramp up to 10,000 a week by year’s end. But it has been dealing with what it calls production bottlenecks at its massive battery factory, called the Gigafactory, near Reno, Nev.

To tide it over, the company, which is rated B2 by Moody’s Investors Service and B- by S&P Global Ratings, raised $1.5 billion in the junk bond market last summer.

At the time, Moody's analyst Bruce Clark noted that, with the Model 3, "Tesla has brought together the technologies, design and manufacturing processes that have the potential to produce a profitable, high-volume electric vehicle that also has advanced autonomous driving capabilities."

But Clark also warned about the "considerable execution risks associated with the rapid ramp up in production of a totally new vehicle," over the following 12 months.

Tesla will announce fourth-quarter and full-year 2017 earnings on Feb. 7.

Leases backed by electric vehicles pose some additional risks for potential investors as well. To date, other manufacturers have added leases on electric vehicles to larger pools of collateral comprised primarily of leases on internal combustion vehicles, rather than securitize them separately. In December, Moody's warned that it is much more difficult to predict what battery electric vehicles, plug-in hybrid electric vehicles and hybrid vehicles will be worth when they come off lease than it is for vehicles that run on internal combustion engines.

Lessors estimate the residual value of a car or truck in order to set lease payments. Should the vehicle fetch less than expected when it comes off lease, their profits could be reduced, or they could potentially face a loss. Likewise, bonds backed by auto leases could see a shortfall in interest or principal payments if vehicles coming off lease are worth less than anticipated, Moody's wrote.

Tesla Auto Lease Trust 2018-1 will not be the company's first trip to the securitization market. Tesla obtained an asset-backed platform through it 2016 acquisition of SolarCity, which funds lending for residential and commercial solar-panel installation by bundling loans and leases into collateral for bonds.

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