Chinese electric vehicle manufacturer Nio (NYSE: NIO ) experienced a 10.4% decrease in its market capitalization on Tuesday, following the announcement of its plans to raise funds through the issuance of convertible senior notes. The company's decision to acquire $1 billion in new debt aims to offset its ongoing negative free cash flow.
Nio intends to issue $500 million worth of convertible senior notes due 2029 and another $500 million worth of the same due 2030. In addition, the company disclosed an overallotment option that could potentially increase the total new debt to $1.15 billion. These convertible notes can be converted into Nio stock, a move that could result in dilution for existing shareholders.
This decision comes against the backdrop of Nio's financial performance last year, where it reported losses of $2.1 billion and negative free cash flow of $1.6 billion. According to S&P Global Market Intelligence, the company is not expected to achieve profitability until 2027.
The funds raised from the new debt issuance will be partially used to pay off existing debt, with any remaining funds directed towards strengthening the company's balance sheet position, as reported by Yahoo! Finance.
However, this strategy does not address Nio's underlying issue of generating profits from its electric car sales. Unless a solution is found for this fundamental problem, investors may anticipate further debt offerings and potential market sell-offs in the future.
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