Four weeks ago today, on June 12, Elon Musk’s Space Exploration Technologies (SpaceX) (NASDAQ: SPCX) cemented its name in Wall Street’s record books. SpaceX raised $85.7 billion with its initial public offering (IPO), including the underwriters’ overallotment, nearly tripling Saudi Aramco’s IPO capital raise in December 2019.
Although SpaceX combines two of the hottest addressable opportunities on Wall Street — artificial intelligence (AI) and the space economy — with the track record of Elon Musk, success is far from a given for this roughly $2 trillion company.
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A laundry list of headwinds threatens to pull the rug out from beneath SpaceX’s shareholders. While many of these catalysts have been front and center for months, arguably, SpaceX’s biggest red flag is something no one appears to be paying attention to.
The bond market is sending a terrifying message to SpaceX
In addition to raising $85.7 billion from its IPO, which SpaceX plans to use to expand its AI infrastructure, enhance its satellite-based broadband network (Starlink), and further its space technologies, the company’s prospectus (S-1 filing) made clear that debt and/or equity offerings would be on the table.
Less than two weeks after going public, SpaceX raised $25 billion through a five-tranche debt offering, with coupon rates ranging from 5.35% to 6.65% for notes maturing between 2031 and 2056.
While investors have monitored SpaceX’s share price like a hawk since its public debut, the average investor doesn’t pay much attention to corporate bond prices. The best aspect of the bond market, in my view, is that it’s much better at removing emotion from the equation.
Corporate bonds are valued around par ($1.00) when issued. Since trading began in SpaceX’s 2056 notes (a $3.5 billion loan tranche), the price of the bonds has fallen almost every session. Listed with an issue price of 99.45 cents on the dollar, SpaceX’s 2056 bonds closed out the July 7 trading session at 94.52 cents on the dollar.
Longer-dated maturities should have higher coupon rates to accommodate an investor’s capital being tied up for a long period, and the 6.65% coupon rate for the 2056 bond fits the bill. But the fact that SpaceX’s 2056 bond price has continued to fall, thereby pushing up the annual yield, suggests that bond investors want more reward for the perceived risk they’re taking on by holding this debt tranche.
