Some SpaceX bonds are already sinking into junk-like territory

The price of SpaceX’s longest-running bonds fell to 90.7 cents on the dollar this week, and their effective yield fell to a junk-bond-like 7.5%.

That’s despite bond investors lending billions of dollars to Elon Musk’s company and saying they intend to delay the principal maturity until 2056.

SpaceX’s long-term bonds rank high after plummeting 9.3% died last Included in 1,450 benchmark corporate bonds rated U.S. investment grade “BBB”.

The bond’s credit spread, or the excess yield required by lenders to take on SpaceX’s idiosyncratic risk, worsened to 231 basis points from 175 basis points at the time of issuance.

At the same time, Musk’s company’s stock price has plummeted from its highs, trading below its offering price, so it’s no surprise that the value of its bonds has followed suit.

SpaceX collapses from highs to lows

For obvious reasons, bond prices typically correlate with rapid declines in the issuing company’s common stock price.

Fear is often company-wide and typically not specific to its creditworthiness as opposed to its general business outlook.

A bond trader at Post Oak Group explained the irony of SpaceX having to raise money from the bond market so early on as a public company.

“Two weeks after its largest IPO in history, SpaceX is already tapping the debt market with a $5 billion net loss and more than double its CapEx year-over-year,” he told CNBC.

In fact, according to SpaceX’s own filings, company-wide capital spending increased 86% to $20.7 billion, which is not double, but close enough.

Meanwhile, SpaceX also absorbed another loss-making business from the Grok side of X, the xAI division, which lost $6.4 billion from the business.

To make matters worse, SpaceX began subsidizing xAI at a time when debt was mounting across the AI ​​industry. Nvidia, SpaceX, and Amazon unloaded $75 billion in bonds to investors in a matter of weeks, emptying bond traders’ pockets just when SpaceX needed additional borrowing.

If supply is plentiful, the answer is predictable. That’s a drop in price.

On June 23, SpaceX held its first bond sale in five installments with maturities between 2031 and 2056. The company received an additional $20 billion in bridging financing earlier this year.

Initially, demand seemed bottomless. Buyers were willing to place nearly $90 billion in orders at the time of publication. Then bond trading began.

At the time of publication, buyers recorded a paper loss of approximately $305 million in the first two days of secondary trading.

Difference between bond yield and price

SpaceX’s bonds (also known as notes), which mature in 2056, pay a fixed 6.65% coupon. That means the company would have to pay $66.50 a year for every $1,000 in face value for 30 years.

These payments (also known as “coupons”) are fixed. However, the prices of these bonds fluctuate in terms of their overall value to investors.

In other words, the amount the buyer pays for that fixed payment stream changes every day. This is the variable “price” of the bond and is different from the coupon payment yield.

If you buy a bond at a discount, you will earn a higher profit because the stream of payments is constant. Price and yield are two ends of a seesaw. One goes down and the other goes up.

In SpaceX’s case, the bonds sold for 99.45 cents on the dollar in June and had fallen to 94.52 cents by July 7. It’s now trading at an even worse 90 cents on the dollar, enough to push the effective yield (due to low bond prices) to a junk-like rate of 7.5%.

Second, a bond’s “spread” is the portion of its yield above the U.S. Treasury rate, a risk premium primarily due to SpaceX.

If this spread widens or widens, the market will lower SpaceX’s credibility.

Man Group calculated that SpaceX’s 30-year bond pays a higher effective yield than the average junk-rated borrower, despite its investment-grade rating.

Bondholders and shareholders alike grieve.

SPCX’s general shareholders have similar grievances.

The company’s stock peaked at $225.64 on June 16, days after its IPO that ultimately raised $85.7 billion. Since then, they have given up more than $1 trillion in market capitalization.

After SpaceX announced the bond sale on June 22, SPCX stock fell 16% in one day. On Thursday, SPCX closed at $131.11, below its IPO price of $135 for the first time and down about 42% from its all-time high.

Stockholders can at least tell themselves about a trip to Mars. Bondholders have no benefit in the possibility of space travel, only the hope that the coupon will be paid in full.

SpaceX still owes lenders a 30-year 6.65% coupon. But within three weeks, an increasingly uncertain market has driven down the price of the bonds, already discounting months of payments.