You might think Rivian (NASDAQ:RIVN), a front-runner in the electric vehicle (EV) industry with backers like Amazon, would be flush with cash. However, as of its most recent quarter, its cash balance had shrunk to an estimated $1.1 billion. The aggressive burn rate underscores the urgent challenges Rivian faces in a highly competitive market.
Today, it popped 9.22% intra-day before falling 7.77% after hours on the news that it plans to offer $1.5 billion of green convertible senior notes.
Although the Irvine-based company beat Q3 delivery expectations and has some wind behind its sails, this new offering raised eyebrows and dropped share prices.
What Does Rivian’s Convertible Debt Mean?
Convertible bonds can be redeemable at the issuer’s discretion after a specific period. In Rivian’s case, these bonds can be redeemed, in whole or in part, from October 20, 2027, through October 15, 2030, if the sale price per share exceeds 130% of the conversion price for a certain timeframe.
Rivian plans to sell these convertible notes due in 2030, primarily to qualified institutional buyers. These notes can be converted into shares, creating a dilutive effect on the stock, which is what we saw today after-hours.
Initial purchasers have an option to buy up to an additional $225 million within 13 days after the bonds are issued.
Why Is Rivian Issuing Debt Now?
Rivian said the net proceeds would be used to finance, refinance, and make direct investments in eligible green projects.
This comes at a time when the company is trying to de-risk the launch of its R2 vehicle family in Georgia, according to a company spokesperson.
This isn’t Rivian’s first foray with green bonds; a similar $1.3 billion bond sale took place in March to help with the same project.
It’s worth noting that the timing of this offering comes on the heels of Rivian’s preliminary Q3 revenue report, falling between $1.29 billion to $1.33 billion, mostly in line with the $1.3 billion consensus estimate by Bloomberg analysts.
Yet, just this week, the company stuck to its full-year guidance of producing only 52,000 battery-electric vehicles. With Rivian’s estimated cash balance depleting from $10.2 billion in June to $9.1 billion in September, one can understand the cautionary approach.
Market Reaction Muted
The bond issuance news resulted in a 7.22% drop in Rivian’s stock price during after-hours trading. Such a move is expected given that convertible bonds typically dilute the value of existing shares. But despite the immediate backlash, some analysts view the issuance as a prudent move for Rivian.
Ivana Delevska, chief investment officer of Spear Invest, commented that Rivian’s decision to sell green bonds was “prudent” because the “market could get really tight.”
Broader Implications Could Be Positive
Rivian is part of a larger pack of EV startups looking to dethrone market leader Tesla. Its tie-up with Amazon offers a promise of long-term revenue, as it manufactures delivery vans for the retail giant. However, it’s also been reducing its cash pile in an effort to catch up to Tesla.
What seems like an alarming dilution strategy could be a step towards greater long-term stability. Rivian has emphasized that the primary goal is to maintain a conservative balance sheet, especially critical when rivals like Tesla have considerable dry powder and are willing to adjust prices to maintain market share.
This bond sale, therefore, could be Rivian’s gambit to shore up its resources as it prepares for an extended market battle.
The convertible bond issuance serves as a reality check for Rivian investors who had bought into the EV buzz and glossed past the financials. However, it’s essential to remember that the EV industry is not just about speed but also about endurance.
Whether this move sets Rivian on a path to stable and sustainable growth or further stock volatility remains to be seen. But one thing is for sure: the race in the EV market is far from over, and Rivian is doing everything it can to stay in it for the long haul.
Rivian’s convertible green bonds were not received well by the market, but it’s clear that management is willing to take the steps necessary to fortify the firm’s balance sheet.
As the EV market matures and competition intensifies, the strength of a company’s balance sheet could become a significant differentiator. Rivian, it seems, is keenly aware of this fact and is planning its moves cautiously yet ambitiously.
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