Invesco's Matt Brill gave SpaceX's recent $25 billion bond deal a "red card," expressing significant concerns about the company's financial strategy. This stance comes after SpaceX debuted its $25 billion bond sale following its $86.2 billion IPO. Brill's apprehension stems from S&P Global's projections that SpaceX will need to raise approximately $250 billion in debt and $150 billion in equity by the end of the decade to finance its ambitious AI and space projects. This raises questions about the long-term sustainability of the company's funding model, especially given that its bonds were already under pressure, with 30-year notes falling below 96% of face value post-issuance.
The bond deal, despite being heavily oversubscribed with orders reaching $90 billion, saw demand skewed towards the short end. The longer-dated bonds, particularly the 30-year notes, widened by as much as 0.28 percentage points past their issue spread, leading to around $305 million in paper losses for traders. This rapid weakening in the secondary market is unusual for an investment-grade issuer. For example, the 30-year bonds traded at 196 basis points over US Treasuries, compared to an initial pricing of 175 basis points over.
Analysts from S&P, who rated SpaceX BBB with a stable outlook, project negative cashflow of nearly $230 billion between now and the end of 2029, even with a five-fold increase in revenues. While the ratings agencies cited SpaceX's $100.8 billion cash pile from the IPO and management's commitment to keeping leverage down as justifications for investment-grade ratings, some analysts questioned these decisions given the company's massive projected capital requirements. The company's executives indicated a commitment to maintaining leverage below three times EBITDA, though free cash flow remains a concern for bond buyers. The CEO's dependence was also flagged as a key rating constraint by Fitch Ratings.
Amidst these financial developments, a credit default swap (CDS) market for SpaceX has rapidly developed. S&P began publishing prices on SpaceX CDS, with five-year protection trading around 141 basis points, implying an annual cost of about $141,000 to insure against a default on $10 million of the company's debt. This indicates growing investor demand for tools to hedge against potential risks. The swift establishment of an active CDS market highlights the market's high interest and the volatility surrounding a company that previously had little outstanding debt.
Comparatively, CDS on Oracle trades at about 171 basis points, and Meta Platforms is closer to 70 basis points. The market is pricing SpaceX's credit closer to a Double B than a Triple B, reflecting skepticism despite its investment-grade ratings from major agencies. This suggests that while ratings agencies may be comfortable with SpaceX's current liquidity and management's stated commitments, the market is factoring in the enormous capital expenditure needs for its AI and space ventures, as well as the potential for future funding challenges.
