Shares of Chinese electric car company Nio (NYSE: NIO) gave back 10.4% of its market capitalization Tuesday morning (through 10:50 a.m. ET).
It has only itself to blame.
This morning, you see, Nio announced that it is planning to offer $500 million worth of convertible senior notes due 2029 and a further $500 million worth of convertible senior notes due 2030.
Don’t be confused by the terminology. While “convertible” means that these “notes” can potentially be converted into Nio stock, basically what is going on here is that Nio is taking on $1 billion in new debt in a bid to raise cash to fund its ongoing cash bonfire of negative free cash flow. What’s more, the company is giving its investors an overallotment option to acquire even more notes, such that the total amount of new debt could end up being as high as $1.15 billion.
Now, there is good news and bad news here for Nio investors. The good news is that Nio will use at least some of the cash it is raising to roll over old debt. And what money Nio doesn’t use for this purpose will be used “mainly to further strengthen its balance sheet position,” according to Yahoo! Finance.
The bad news is that convertible debt like this may end up being converted into Nio shares (diluting existing Nio shareholders out of part of their ownership interest in the company). And the bad news also is that…well, the reason Nio has to take on debt is that the company still can’t earn a profit on its own. Last year, Nio reported a staggering $2.1 billion in losses and negative free cash flow of $1.6 billion.
Until Nio figures out a way to earn a profit from selling electric cars, investors should expect debt offerings like this one — and debt offering-inspired sell-offs like this one — to continue for some time.
(For what it’s worth, most analysts polled by S&P Global Market Intelligence don’t expect Nio to turn profitable before 2027.)
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nio. The Motley Fool has a disclosure policy.
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