Tesla Inc. TSLA 1.63% is scheduled to deliver its largest-ever bond payment Friday, a move that will likely use up nearly a quarter of its cash at a time when the company faces increasing scrutiny from regulators and investors.

The electric car maker had issued $920 million in convertible, senior notes five years ago, a period when rapid growth and optimism around its Model S electric car drove a furious rally in Tesla shares. Reflecting that, the strike price for the notes, or the level at which the notes would be fulfilled by a conversion into Tesla stock, was $359.87 a share, or 42.5% above the level at that time.

Yet because shares closed at $319.88 Thursday, Tesla will have to make good on its obligation using cash. That will wipe out a substantial portion of the $3.69 billion in unrestricted cash and equivalents the company reported at the end of 2018.

“This is the latest nightmare for the company,” said David Kudla, chief executive officer of Mainstay Capital Management, which has been shorting Tesla shares, or betting that they will decline in value. “Their ability to raise capital in the markets is getting more and more limited.”

A Tesla spokesperson declined to comment. Back in January, Mr. Musk told shareholders in a letter that the company had “sufficient cash on hand” to cover the debt.

On Thursday, though, Tesla said it would begin shutting stores and move to selling vehicles only over the internet, an extraordinary step aimed at cutting costs so the company can offer its Model 3 compact at a long-awaited starting price of $35,000. Mr. Musk added that he didn’t expect Tesla to be profitable in the first quarter. Shares fell in after-hours trading.

One upside: If Tesla makes the debt payment, it will have defied some skeptics who argued last year that it could do so only by issuing more debt or equity given its long history of burning through cash. Tesla has generated positive free cash flow for the past two quarters.

Still, the payment highlights the risk companies face in leaning on convertible bonds, which give investors the right to exchange their debt for equity if share prices hit a predetermined level. They have become an increasingly popular way for technology companies to raise capital, since the securities carry lower coupons than traditional corporate bonds and don’t immediately dilute shareholders. ...


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