Cash can be tight for those start-up companies that have yet to sell any products. Best, then, that managers of those groups avoid unnecessary expenses.
Nikola Corporation, the clean-energy truckmaker, violated this principle last year in dramatic fashion. The Arizona-based company agreed to a $125mn settlement with the US Securities and Exchange Commission over charges that it had deceptively hyped its technology to public market investors, notoriously in a promotional video of its vehicle rolling downhill relying solely on gravity.
Nikola announced on Monday that it had raised $200mn from selling a convertible bond to a hedge fund, Antara Capital, at onerous terms. Once a Spac darling, two years ago its market capitalisation touched more than $20bn. That equity value sits closer to $3bn today.
The little market value that remains reflects option value, that the ecosystem for hydrogen fuel cell and battery trucks Nikola hopes to build will eventually materialise. But with financing markets suddenly no longer lenient, any interim capital needs come with painful terms.
Most convertible bonds issued to the public also offer options, and thus have coupons of less than 3 per cent. Much of the value of security resides in the chance to buy the issuer’s stock. As a tempter, the conversion price this time has a low premium over the current share price. However, Nikola’s convertible has a whopping 11 per cent coupon, payable in shares to avoid cash expense.
That is understandable. Nikola most recently reported a cash balance of about $500mn Meanwhile, management recently forecast that the truckmaker would spend as much as $800mn this year to get its trucks on the road, highlighting the urgency for this external capital raise.
Even for all its woes, Nikola’s shares have held up reasonably well compared with many other nascent companies that could list quickly via blank cheque mergers. The IPOX Spac index hit an 18-month low this week. Even with this convertible’s punishing terms, the fact that Nikola found a willing investor is an accomplishment itself.