READ: Moody’s March 23 rating decision

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ON Friday evening Moody’s announced that it would not be cutting the rating on SA sovereign debt to below investment grade.

Read the rating statement here:

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* For the full Moody’s statement visit www.moodys.com

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Treasury’s Mogajane: ‘We had to safeguard the ratings with our lives’

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Johannesburg – Treasury Director General Dondo Mogajane says “emotions ran high” among senior staff after they learned Moody’s Investor Services would grant the country a rating reprieve while revising SA’s outlook from negative to stable.

“If Moody’s downgraded us, we would have been out of the Citi World Government Bond Index, [this] means some investors I know in Hong Kong, London and New York told us they’ll have to reduce their exposure (to government bonds)”, Mogajane told Fin24 in a telephone interview on Saturday morning.

Moody’s on Friday night affirmed SA’s long term foreign and local currency debt ratings at ‘Baa3’, one notch above sub-investment grade.

It also revised its outlook to stable from negative, citing changes in SA’s political arena, the strengthening of key institutions, improved economic growth, and commitment to fiscal consolidation.

Treasury officials received the rating review around 48 hours before it was made public.

“We had to safeguard the ratings with our lives, it hasn’t been easy, the sacrifices [people in] Treasury made were on behalf of the country,” an emotional Mogajane said.

“We will pop champagne on Monday, will give the team 30 minutes to rally around and thank each other and then carry on working. Budget 2019 processes will get underway soon”.

Mogajane spent the last few weeks out of the country as part of an investor roadshow, which included meetings with ratings agencies and attending the G-20 summit of finance ministers and central bankers in Buenos Aires, Argentina.

He told Fin24 that, by the time he was finished talking to Moody’s in London earlier this month, he was “comfortable” that the credit rating on SA government debt would not be cut to sub-investment grade.

“We are not surprised, because our story holds, the story put together for the budget holds”.

Future upgrades

Standard & Poor’s and Fitch are expected to review South Africa’s credit rating in the next few weeks. Both ratings agencies have generally been more pessimistic about SA’s economy than Moody’s.

They both downgraded South Africa to sub-investment grade in 2017. 

Mogajane said the country “wouldn’t have to do much” for the ratings to be revised upwards, adding SA can “only be looked at differently” due to structural reforms being undertaken.

“There was a peaceful transition from the Zuma administration to the Ramaphosa administration,” he said. “They were worried about the debt to GDP ratio, it was hitting the roof, and we addressed the issues on the revenue side and the expenditure side”

“They had issues with state owned companies, nothing was happening. We dealt with Eskom, there’s a new board and Eskom is on the right track, lenders are coming back to Eskom”, Mogajane said

Watching land reform 

The director general said he’s “eagerly watching” the work being done by the constitutional review committee on the National Assembly’s resolution to investigate changing legislation to accelerate land reform.

“We shouldn’t be alarmed … we can’t approach the land issue lightly”. The issue was raised by ratings agencies and investors in London and the US.

Moody’s, in its rating announcement Friday, said the way government handles land expropriation will be a test of its ability to balance attracting investment and alleviate poverty.

Mogajane pointed to the “pretty peaceful” democratic transition as an example that the country is able to engage in “difficult conversations”.

“I am comfortable we are on the right track”.

There are several “low hanging fruit” which the government can use to increase economic growth and confidence this year, including the opening up of spectrum in the telecommunications industry and the finalisation of the reviewed Mining Charter. 

“I’m comfortable that the minister of mineral resources, Minister Mantashe, understands the sector. He’s senior in the ANC and committed to turning around the sector.”

He said there has been no new investment in the mining industry over the last few years, due to policy uncertainty. The resolution of the impasse over the Charter will give the sector the boost that it needs. he said. 

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Moody’s reprieve ‘not enough’ for hard-pressed consumers

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Johannesburg – Although all South Africans will benefit from the Moody’s move not to downgrade South Africa, it is not enough for hard-pressed consumers, warned debt counselling firm Debt Rescue.

The Banking Association of South Africa
(BASA) on Saturday welcomed Moody’s affirmation of South Africa’s investment rating, saying that another downgrade would have increased the cost
of borrowing for the state, companies and financial institutions.

On Friday night, the ratings agency affirmed South Africa’s
long term foreign and local currency debt ratings at ‘Baa3’ and revised the
outlook to stable from negative, citing changes in the political arena, the
strengthening of key institutions, improved economic growth and commitment to
fiscal consolidation as reasons for their decision.

“All South Africans – business and consumers – will benefit
from this show of confidence in the progress the country has made in addressing
some of the concerns previously raised by the rating agency, and in its economy
that is beginning to show some growth,” BASA said in a statement. 

Sanisha Packirisamy, an economist at Momentum Investments
said in a research note that a downgrade to SA’s local currency rating to junk
status by Moody’s would have triggered SA’s exclusion from the Citi World
Government Bond Index which could have prompted “significant capital outflows”
from the SA government bond market of between R85bn to R130bn. 

This is, however, only a slight reprieve for “hard-pressed” consumers who are facing the Value Added Tax (VAT) hike and a total 52c/l fuel and RAF levy increase on 1 April, warned Debt Rescue CEO Neil Roets on Saturday.

“Unfortunately we need much more than just this titbit of
good news to make a real difference. Real economic growth – well beyond the
1.1% which is being predicted by the World Bank – is needed to significantly
improve the lives of our people,” he said.

Non-negligible risk of going backwards

Packirisamy cautioned that there were issues South
Africa still needed to address before celebrating the Moody’s decision as there
remained a “non-negligible risk of a change in Moody’s outlook from stable
back to negative” when they review their rating in October.

She said investors would be seeking clarity on the adoption of land expropriation without compensation as a policy of the ruling party and would remain
vigilant of signs that the rule of law had been reinstated in the country
through the conviction of a number of individuals involved in high-profile
corruption cases. 

Packirisamy said Momentum Investments did not expect any further
negative action from the other ratings agencies in their next rating cycle. Standards
& Poor’s (S&P) and Fitch both downgraded South Africa to
sub-investment grade in 2017.

“A ratings outlook upgrade will remain dependent on
S&P’s growth forecasts and progress on growth in GDP per capita trends.”

Packirisamy, said that S&P was expected to review South
Africa on May 25 2018, while Fitch did not announce its review schedule.

Window of opportunity

The CEO Initiative meanwhile said the Moody’s move “offered the country
a window of opportunity” to improve its credit rating through further structural reforms.

“The decision is largely attributed to the
confidence-enhancing measures taken in key areas over the past three months,
including a smooth presidential transition, the appointment of a new board for
Eskom, and the presentation of a fiscally responsible Budget,” said the co-convenor
of the CEO Initiative Jabu Mabuza, who is also Eskom’s chairperson.

The CEO Initiative acknowledged that improving South
Africa’s credit rating wasn’t an end in itself but an outcome of structural
reforms “that will restore our country to faster, more sustainable and more
inclusive economic growth”.

South Africa’s top CEOs  said that they were “particularly encouraged” by recent actions taken in the establishment of the
commission of inquiry into state capture and the review of the funding models
for state-owned companies, announced in the February budget speech.

The CEO Initiative also hailed President Cyril Ramaphosa’s
decision this week to place South African Revenue Service (SARS) commissioner
Tom Moyane on suspension and replace him with tax veteran Mark Kingon in an
acting capacity
.

“South Africa should use this window of opportunity by
responding appropriately to the significant challenges we face, in order to
improve the lives of our citizens and inspire confidence in the future of our
country,” Mabuza said.

Ramaphosa, Finance Minister Nhlanhla Nene and the CEO
initiative was set to launch the Youth Employment Services (YES) campaign next week.
The YES campaign was aimed at giving internships and work experience to one million young people in
the next three years, in a bid to alleviate the high youth unemployment rate of
51.1% in January, according to data from Statistics South Africa.

Investec CEO
Stephen Koseff previously complained about the slow pace and government 
bureaucracy in implementing the YES programme.

Cabinet last week approved the launch on Tuesday of the pilot at the
Riversands Incubation Hub in Diepsloot, Johannesburg.

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Business warns against complacency following Moody’s reprieve

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Johannesburg – While the decision by Moody’s
Investor Services to affirm South Africa’s credit rating and change the outlook
from negative to stable, was widely welcomed, business on Saturday warned against complacency.

National Treasury said the Moody’s ratings decision proved that if South Africans work
together, “remarkable outcomes can be achieved”.

Moody’s kept South Africa’s long term foreign and local
currency debt ratings at ‘Baa3’, one notch above sub-investment grade, on Friday
night, after placing the country on a 90-day review for a downgrade in November last year. 

The ratings agency, which is the only one of the three
major institutions to have South Africa at investment grade, cited changes in
the political arena, the strengthening of key institutions, improved economic
growth and commitment to fiscal consolidation as reasons for its decision.

There were however some concerns related to the manner in
which government will handle increased pressure on spending and balance
attracting investment, while trying to alleviate poverty.

“The government fully recognises Moody’s assessment of
challenges and opportunities the country faces in the immediate to long-term,”
Treasury said in a statement late on Friday night.

The government also thanked all the sectors who had
contributed to the “positive rating outcome” and that President Cyril Ramaphosa
had committed to fast tracking structural reforms.

No reason for complacency

Business Leadership South Africa welcomed the ratings
reprieve by Moody’s saying that country is “correcting some of our own goals” but
warned against complacency. 

“The unequivocal message from investors is that South Africa
must deal with corruption and fix state-owned enterprises (SOEs). Considerable
progress is being made on both fronts,” said BLSA CEO Bonang Mohale who met
ratings agencies in London, together with Treasury and labour, earlier in
March.

Mohale added that recent political developments such as the
appointment of President Cyril Ramaphosa and the Cabinet reshuffle which
removed most of the problematic ministers”, have been positive for the
country.

“The challenge now is to build on the positive momentum for
the remainder of the government’s term of office between now and next year’s
elections.”

The Banking Association of South Africa (BASA) said local banks were willing to work with
government and other stakeholders to ensure that South Africa made the best use of this
opportunity to build an inclusive economy.

BASA said this ratings decision was a clear indication of
what can be achieved by strong leadership which was committed to acting in
support of good governance.

The banking grouping, however, cautioned that South Africa would only regain its
investment rating from all three major credit rating agencies once it achieved
sustainable levels of higher economic growth and tackled its unacceptably high
rates of unemployment, poverty and inequality.

To achieve this, BASA said South Africa needed: Increased policy certainty, especially on
property rights, land reform and the mining charter; structural reforms in the economy; stronger fiscal discipline and good governance
to eliminate wasteful and unauthorised expenditure; and meaningful transformation and empowerment to
ensure all South Africans have a stake in the economy.

The Democratic Alliance (DA) hailed Moody’s decision as
“good news for the South African economy but said that it would need to be
accompanied by  “a sustained programme of action” by President Cyril
Ramaphosa and Finance Minister Nhlanhla Nene for “significant investment” to
take place.

The DA’s spokesperson for Finance Alf Lees warned against
“populist” policies such as expropriation of land and the Mining Charter being
used to unite the ANC and “subdue investment”.

“The welfare of ordinary South Africans supersedes the ANC’s
narrow party political interests”, Lees said in a statement on Saturday
morning.

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5 reasons why Moody’s gave SA a ratings breather

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Johannesburg – In a late night ratings review, Moody’s Investor Services
affirmed South Africa’s long term foreign and local currency debt ratings at
‘Baa3’ and revised the outlook to stable from negative.

This ended three months of the country waiting on
tenterhooks, after being placed on a 90-day review for a downgrade in November,
following the Medium Term Budget Policy Statement (MTBPS) and the breach of the
fiscal ceiling. 

A downgrade by Moody’s to sub-investment grade (junk status)
would have removed South Africa from the Citi World Government Bond Index which
would have forced many asset managers and pension funds to sell South African bonds,
hiking the cost of debt.

Before the announcement, the rand firmed more than 1.3% to
the US dollar, to trade below R11.70, for the first time since 6 March at
R11.69. The local unit closed trade on Friday night 0.97% firmer at R11.73. 

Here’s what changed for the rating agency in the last 90
days:

1. Changes to Treasury, SARS and state-owned
companies 

Moody’s hailed the recent change in political leadership, saying it offers “a real prospect of a decisive reversal in the erosion of strength”.

The ratings agency said that while it is still very early days, “the speed with which President [Cyril Ramaphosa] has moved to replace the leadership in key institutions, including the Ministries of Finance, Mineral Resources and Public Enterprises and most recently in SARS, illustrates the resolve to address the problems of the recent past and to set the state, society and the economy on a new and positive path”.

Ramaphosa reshuffled the Eskom board in January and in a late night Cabinet reshuffle on February 26, he replaced Malusi Gigaba with Nhlanhla Nene as finance minister, Lynne Brown with Pravin Gordhan as public enterprises minister and Mosebenzi Zwane with Gwede Mantashe as mineral resources minister. 

This week, he suspended Tom Moyane and appointed Mark Kingon as acting commissioner of SARS.

Moody’s said that prior to this, there had been “a gradual
erosion in the strength of some key institutions”, which had impacted
negatively on South Africa’s economy and fiscal position.

2. Improved economic growth

Moody’s stated that the changes in political leadership are
taking place alongside signs of cyclical, and possibly structural, improvements
in economic growth.

The South African economy grew by 1.3% in 2017, exceeding
Treasury’s forecasts of 0.7% -1% growth. Moody’s described the growth as being
cyclical and partly due to one-off-factors such as the end of the
drought. 

Treasury has penciled in 1.5% growth for 2018 and the
ratings agency praised the “sharp recovery in business and consumer
confidence”, and the improvement of the rand since December. 

Moody’s is optimistic that structural reforms are taking
place in mining, SOC’s and energy  reform and  believes that future
growth is likely to come from these sectors.  The agency is also confident
that the improvement in the business climate can be sustained.

3. Fiscal consolidation

Moody’s saw the February budget speech as a turnaround from
the October Medium-term Budget Policy Statement and described it as having a clear strategy to address rising
fiscal pressures with tax hikes and spending cuts, despite the R12bn
increase to fund free higher education for 2018/2019.

The ratings agency hailed the Value Added Tax (VAT) hike to
15% as significant because it’s the first increase in
indirect taxes for over two decades and called it a “marked and credit
positive, policy shift”. The VAT hike is expected to kick in on April 1 2018.

“Overall, Moody’s now expects the government’s debt burden
to stabilise at around 55% of GDP over the 2018- 2020 period”.

4. Mining Charter revisions

Moody’s cited the current talks around Mining
Charter lll, led by Mantashe, as one of the reasons why South Africa
was moved from a negative to a stable outlook.

“Satisfactory progress in this area will be an important
test of the ANC’s authority and ability to reach the compromises needed to push
through a broader reform agenda.”

Business, labour and mining communities objected to the
previous Mining Charter which was spearheaded by former minister
Zwane. The issue was highlighted as a cause for concern by investors who warned that
it created policy uncertainty.

The Chamber of Mines agreed to shelve their court challenge
in December and hold discussions for a new charter.

5. Land reform

Perhaps surprisingly, Moody’s downplayed the National
Assembly’s adoption of a motion to consider constitutional changes to land reform
and property rights, and instead adopted a wait-and-see approach.

The ratings agency said it remained unclear how the
government will deal with policy and what impact it will have on agricultural
production and food security. 

The way land expropriation is dealt with by the Ramaphosa
administration will provide “important insights” how government plans to
balance attracting investment with its commitment to address unemployment,
inequality and poverty, according to Moody’s.

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JUST IN: Moody’s keeps SA at investment grade

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Cape Town – Ratings agency Moody’s on Friday night kept South Africa’s sovereign debt at above investment grade, and changed its outlook to stable.

The announcement was made at 23:35.

“The confirmation of South Africa’s ratings reflects Moody’s view that the previous weakening of South Africa’s institutions will gradually reverse under a more transparent and predictable policy framework,” it said in a rating announcement.

“The recovery of the country’s institutions will, if sustained, gradually support a corresponding recovery in its economy, along with a stabilization of fiscal strength.”

If Moody’s had downgraded the credit rating on SA’s debt, the country would have automatically been removed from the Citi World Government Bond Index, forcing asset managers to sell SA bonds.

This would have resulted in billions of rands leaving the country.

The rand, which opened at 11.85/$ on Friday morning, was trading at 11.74 to the greenback shortly after the announcement.

While its rival ratings agencies Fitch and S&P both downgraded SA to junk last year, Moody’s had in November 2017 maintained its sovereign rating for SA at Baa3, one rung above junk status.

On Friday t said SA’s rating would remain at Baa3. 

Cautious optimism justified

Before the rating announcement was made, top Treasury officials and SA business bodies had been cautiously optimistic that Moody’s would keep SA Inc at above investment grade. 

This followed an investor roadshow to the UK and US last week, where a SA delegation of government, business and labour officials met with the three major ratings agencies, including Moody’s. 

On Thursday Deputy Finance Minister Mondli Gungubele said at a meeting of public policy makers and business leaders in Johannesburg that Treasury had recently conducted “very frank and honest discussions” with ratings agencies. “As a result of that, I anxiously, and with all humility expect something better, but that is their decision to make.”

Business Leadership South Africa CEO Bonang Mohale told Fin24 by phone from New York earlier in the week that the mood of ratings agencies around recent developments in SA “seems to be positive”.

Market analysts, meanwhile, had suggested that the relative strength of the rand had indicated that investors were already pricing in the likelihood that SA’s credit rating will not be further downgraded.

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Naspers CEO explains Tencent move

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Cape Town – The most important goal Naspers [JSE:NPN] hopes to achieve with its sale of 190 million shares in Tencent this week is to accelerate and scale its ecommerce businesses, CEO Bob van Dijk told Fin24 on Friday.

“We are excited about the returns from these (ecommerce) businesses so far – about a 23% annual return and even better over the last few years. We see further opportunity to keep investing and growing those businesses,” he explained.

Van Dijk added that, despite having sold the 190 million shares in Tencent, Naspers is still bullish about the Chinese internet giant.

Naspers, which is Tencent’s biggest investor, on Thursday announced an accelerated offering of almost 190 million shares in Tencent, equal to about 2% of the Chinese firm’s issued share capital. The sale raised $9.8bn (about R116bn) and reduced Naspers’ stake in Tencent from 33.2% to 31.2%.

Since investing in Tencent in 2001, Naspers has not sold any of its shares up to now. The shares were offered to institutional investors globally, subject to customary selling restrictions.

“We are true believers in the ability of Tencent. It has served us and our shareholders very well, and continues to do so. We also saw the opportunity to grow more in other segments and wanted to free up some capital for that. We are bullish about Tencent, but also bullish to grow our other businesses to scale,” said Van Dijk.

The Chinese government is supportive of the tech sector, and realises that companies like Tencent are instrumental for the future.

Focus on classifieds

Van Dijk explained that Naspers’ core ecommerce focus remains on generalist classifieds. The group has already been active in this sector for about seven years and has rolled out businesses in many countries.

“Many of the businesses have grown organically into 14 markets, and many are the market leaders in their respective markets. Our core business won’t change, but we believe ‘adjacencies’ can create value too,” said Van Dijk.

“The important thing for us is to make sure this (process) is driven by our confidence in our online businesses, and that is what we want to use opportunities in.”

He pointed out that the sale of some of its Tencent shares does not change the Naspers profile. The company committed not to sell any more of its Tencent shares “for at least three years”.

By late afternoon on Friday, Naspers shares were trading up 3.8% at R3 174.47.

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SpaceX page vanishes as Elon Musk joins #DeleteFacebook crusade

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Michigan – Elon Musk is hopping on the #DeleteFacebook bandwagon.

The chief executive officer of Tesla and Space Exploration Technologies wrote in a series of tweets on Friday that he wasn’t aware there was a Facebook page for his rocket company. After being asked by a Twitter user to delete it, he responded “will do”.

Musk wrote back to another user who shared a photo of Tesla’s official page on Facebook and asked if it too should be deleted: “Definitely. Looks lame anyway.”

Both facebook.com/tesla and facebook.com/spacex are now no longer available.

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SA asks for exemption from Trump metal tariffs

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Cape Town – The Department of Trade and Industry has approached the US to ask that South Africa be excluded from recently-announced tariffs on the imports of steel and aluminium articles.

The duties, which take effect on Friday, include 10% tariff on the imports of aluminium, and a 25% tariff on imports of steel into the US. 

“The [tariff] proclamation makes provision for country-based exclusions from the duties should the US and that country arrive at a satisfactory alternative means to address the threat to the national security,” said the department in media release.

“In this regard, the South African government through the Minister of Trade and Industry, Dr Rob Davies, has made a formal submission to the US requesting the exclusion of South Africa from the imposition of duties on steel and aluminium.”

Countries that are excluded from the duties include members of the European Union, Canada, Mexico, Australia, South Korea and Brazil. 

The department said that Davies told US trade representatives that SA steel and aluminium products accounted for less than 2% of US imports.

“As such, SA does not a pose a threat to US national security and to the US steel and aluminium industries, but is a source of strategic primary and secondary products used in further value added manufacturing in the US contributing to jobs in both countries,” said the department.

“Furthermore, SA assured the US that to a very large extent, the inputs for all steel and aluminium product exports to the US are sourced from local producers and that SA has a robust customs control system which prevents circumvention.”

On Thursday March 22 in a statement Trump said countries affected by the duties were “welcome to discuss a possible suspension” of the tariffs based on a “shared commitment to addressing global excess steel and aluminum capacity and production”.

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For Tesla, cars+cash+credit+convertibles = crunch time: Gadfly

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New York – Opinions differ on the exact nature of Tesla, ranging from struggling car manufacturer to tech pioneer to something akin to the second coming. Regardless, it is undoubtedly one thing: a money machine.

I don’t mean that in the sense of Tesla making a lot of money; more that it is a machine for the raising and consumption of money.

All companies are this to one degree or another, of course; it’s just that Tesla is more at the “another” end of things. Reliably negative on free cash flow, Tesla depends on a smorgasbord of external funding, from equity raising to vehicle deposits to high-yield bonds to securitised leases to negative working capital. And that smorgasbord rests, of course, on Tesla’s famously gravity-defying stock price and faith in CEO Elon Musk.

Which is why these four charts deserve more than a glance from even the most ardent Muskovite:

We’re just over a week away from knowing whether or not Tesla has hit its (much reduced) target for producing 2 500 Model 3s per week by the end of the first quarter. The signs thus far aren’t good, which also raises doubts about the 5 000-a-week target for the end of June.

Hitting these targets matters for the Tesla money machine on three fronts.

First, reducing that risk-laden reliance on negative working capital and getting a return on the money already spent on production lines relies on producing more cars.

READ: Tesla again delays target for ramping up Model 3 output

Second, analysts currently expect Tesla to burn through $2.7bn of cash this year – and analysts tend to be optimistic on this stuff.

Third, when Moody’s rated that bond Tesla sold last August, it was assuming 300 000 Model 3 deliveries this year, which now looks far out of reach.

In other words, Tesla’s money machine will almost certainly need to raise more this year due to the Model 3’s problems – but those same problems undermine the pitch for selling more equity or debt.

This is happening against a backdrop of rising interest rates. Tesla’s debt has jumped in recent years, especially after it took on SolarCity obligations. Interest expense more than doubled in 2017 and reached the astounding level of one-third of gross profit in the final quarter of 2017.

At the same time, Tesla is moving closer to a maturity wall, with $3.7bn of bonds and credit lines needing refinancing by the end of 2020.

About $1.7bn of that consists of three convertible bonds falling due between this coming November and the next one. Almost half of it – inherited from SolarCity – is hopelessly out of the money, with conversion prices starting at $560 (Tesla closed on Thursday at $309 and change).

The rest of it, a $920m convertible due next March, sports a conversion price of just under $360; still underwater, but within sight of the surface.

READ: Tesla averts cash crunch as Musk mystique makes up for late cars

Converting that last one to equity would dilute Tesla’s free float by 2%. But that could be more palatable than the alternative of replacing it with a straight bond.

As of now, those three bonds pay a weighted-average coupon of just over 1%, or about $18m a year. All else equal, assuming they were all refinanced at spreads similar to where Tesla’s 2025 bonds trade now, but factoring in the forecast increase in Treasury yields, that would jump to 7%, or $120m. Putting that in context, Tesla’s entire interest expense last year was $471m.

A rebound in the stock price would take much of this pain away, of course. Half those convertibles would transform into equity and Tesla could simply issue more shares in general (as Musk’s new pay package encourages it to do anyway) or more debt, even at higher rates.

Getting there, though, needs one thing above all else: A steady stream of Model 3s. Cranking up the money machine depends on cranking up that production line. And given Tesla’s mounting burdens, that needs to happen soon.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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