Some SpaceX bonds have already sunk to junk-like territory

The value of SpaceX’s longest-dated series of bonds shriveled to 90.7 cents on the dollar this week while their effective yield sank to a junk bond-like rate of 7.5%.

This is despite bond investors lending Elon Musk’s company billions of dollars and signaling their willingness to delay principal maturity until 2056.

The 9.3% collapse ranks SpaceX’s long bonds dead last among 1,450 benchmark corporate notes rated US investment-grade “BBB.”

The notes’ credit spread, i.e. the extra yield lenders demand for taking idiosyncratic SpaceX risk, has worsened from 175 basis points at issuance to 231.

At the same time, the stock price of Musk’s company has also been cratering from its high and even trading below its IPO price, so it is not surprising to see the value of its bonds follow suit.

A collapse from highs to lows at SpaceX

For obvious reasons, bond prices typically correlate to quick downturns in common stock prices of the corporate issuer.

Fear is often company-wide and not usually unique to its creditworthiness as distinct from its general business prospects.

A bond trader at Post Oak Group explained the irony of SpaceX needing to raise capital from bond markets so early into its life as a public company.

“Two weeks after the largest IPO in history, SpaceX is already tapping debt markets while carrying a $5 billion net loss and CapEx [capital expenditures] that more than doubled year over year,” he told CNBC.

Indeed, SpaceX’s own filings show company-wide CapEx jumping 86% to $20.7 billion — not quite double, but close enough.

Meanwhile, SpaceX also absorbed more money-losing operations from the Grok side of X, the xAI segment which has lost $6.4 billion from operations.

Worse, SpaceX started subsidizing xAI in the middle of an AI industry-wide borrowing binge. Nvidia, SpaceX, and Amazon unloaded $75 billion of bonds on investors in a matter of weeks, emptying bond traders’ pocketbooks right when SpaceX needed to borrow more.

With lots of supply, the answer is predictable: lower prices.

SpaceX priced its first-ever bond sale on June 23 in five slices maturing between 2031 and 2056. It had another $20 billion bridge loan earlier this year.

Initially, demand seemed bottomless. Buyers happily placed nearly $90 billion of orders at issuance. Then, the bonds started trading.

Buyers at issuance logged roughly $305 million of paper losses in the first two days of secondary trading.

The difference between a bond’s yield and its price

SpaceX’s bonds (aka “notes”) maturing in 2056 pay a fixed 6.65% coupon. That means the company must pay $66.50 per year, for 30 years, on every $1,000 of face value.

Those payments (aka “coupons”) are fixed. The price of those bonds, however, fluctuates in terms of their overall value to an investor.

In other words, what buyers will pay for that fixed stream of payments fluctuates on a daily basis. This is the variable “price” of the bond, which is distinct from its yield of coupon payments.

Anyone buying bonds at a discount locks in a fatter return, because the stream of payments is constant. Price and yield are two ends of a seesaw; one falls, the other rises.

In the case of SpaceX, its bonds sold in June at 99.45 cents on the dollar and slid to 94.52 cents by July 7. They now fetch an even worse 90 cents on the dollar, enough to push the effective yield (due to the bonds’ lower price) to a junk-like rate of 7.5%.

Next, the bond “spread” is the portion of that yield above the US Treasury bond rate, and it is risk premium mostly attributable to SpaceX.

When that spread widens, or gets larger, the market is repricing SpaceX as less creditworthy.

Man Group calculated that SpaceX’s 30-year bonds pay a bigger effective yield than the average junk-rated borrower, despite an investment-grade rating.

Bondholders and shareholders grieve together

Common shareholders of SPCX have similar grievances.

Their stock peaked at $225.64 on June 16, days after an IPO that ultimately raised $85.7 billion. Since then, they’ve surrendered more than $1 trillion in market capitalization.

When SpaceX revealed its bond sale on June 22, SPCX shares dropped 16% in a day. On Thursday, SPCX closed at $131.11, its first finish below the $135 IPO price, and roughly 42% off the peak.

Equity holders can at least tell themselves a story about traveling to Mars. Bondholders own no upside on the possibilities of space travel, only the hope for a full slate of coupon payments.

SpaceX still owes its lenders three decades of 6.65% coupons. Yet within three weeks, an increasingly uncertain market has already discounted many months of those payments by repricing those bonds lower.