March 8, 2019 10:45 AM, EST

Financing Deals Put Tesla Closer to Making Model 3s in China

TeslaTesla CEO Elon Musk at a press conference in China where the new plant is set to begin construction. (Qilai Shen/Bloomberg News)

Tesla Inc. secured as much as $521 million in loans from Chinese banks to build a vehicle and battery factory in the country, putting the carmaker a step closer to producing Model 3 sedans at its first overseas plant.

The loans from China Construction Bank Corp., Agricultural Bank of China Ltd., Industrial & Commercial Bank of China Ltd. and Shanghai Pudong Development Bank Co. mature in March 2020, according to a regulatory filing. Tesla also amended a separate asset-backed credit agreement, increasing how much it can borrow by as much as $700 million.

CEO Elon Musk estimated in January that Tesla will need $500 million to get the plant built and production ramped up to 3,000 Model 3s a week. The total cost will be higher, and the company had said it planned to tap local banks for a majority of the funding.

Tesla stock chart

The fresh borrowing follows Tesla’s largest-ever debt payment last week. Settling the $920 million convertible bond that matured March 1 taxed the company’s balance sheet, which had about $3.7 billion in cash and equivalents at year-end.

After years of negotiations with Chinese authorities to become the first foreign automaker to wholly own a manufacturing facility in the country, Tesla broke ground on the outskirts of Shanghai on Jan. 7. Musk has said Tesla plans to start battery and Model 3 production at the factory by the end of the year.

Tesla now can do so by borrowing at favorable rates. The yuan-denominated loans accrue interest at a rate equal to 90% of the one-year rate published by the People’s Bank of China. For dollar-denominated loans, the rate is 1% more than Libor.

Car sales in China have hit a slump, falling for the ninth straight month in February after recording the first annual drop in more than two decades last year. Retail sales of sedans, SUVs, multipurpose vehicles and minivans fell 18.5% to 1.19 million units last month, according to the China Passenger Car Association on March 8.

Battery-powered autos have been a rare bright spot amid the broader market’s slowdown. Beginning local production in China is key for Tesla to reduce the costs of its cars in what is the world’s largest market for electric vehicles. Local manufacturing also will help the company sidestep any re-escalation of trade tensions between the United States and China.

In its filing, Tesla said it amended and restated its asset-backed loan credit agreement to increase the total lender commitments by $500 million to about $2.4 billion. The pact also permits the company to obtain up to $200 million in additional commitment and extend the term of most of the total commitments to 2023.