By Sam Goldfarb Updated Dec. 14, 2018 5:32 p.m. ET Tesla Inc. TSLA -2.94% sold $837 million of bonds backed by auto leases Friday, taking advantage of a rebound in investors’ sentiment toward the company to provide further support to its fast-growing leasing operation. Tesla’s decision to sell the auto-lease bonds comes amid a spate of volatility in debt markets and during a year-end period when many investors lose interest in buying new securities. Yet investors said times are relatively good for the electric-car maker, which recently posted a record quarterly profit despite a year marked by production delays and high-profile missteps by chief executive Elon Musk. The bonds, to a large extent, are more a bet on Tesla’s well-heeled customers than the company itself. The bonds are backed by car-lease payments from customers with very high credit ratings along with expected proceeds from the sale of those cars when the leases expire. As is generally the case with auto-lease bonds, they’re being issued by a special entity aimed at protecting investors in the event of a bankruptcy by the manufacturer. Tesla Inc.Source: SIX July ’18Sept.Nov.240260280300320340360380$400 Tesla sold its first batch of auto-lease bonds in February of this year, raising $546 million at yields slightly higher than comparable bonds sold by more established car companies. As with that deal, its latest bonds are backed specifically by leases on its Model X and Model S vehicles, which typically sell for around $100,000. Due to the timing of the deal and its longer maturities, the new bonds came with higher coupons than the first one relative to benchmark swap rates, investors said. The largest, safest slice of the deal priced 0.85 percentage point above the swap rate—lower than earlier guidance but above the 0.3 initial spread on the comparable portion of the $546 million bond. The riskiest slice was sold at a 5.15 percentage point yield-premium, compared with guidance of around 3.5 percentage points and the earlier deal’s 2.65 percentage-point spread. Selling auto-lease bonds is a common tool for auto manufacturers to finance their leasing businesses. Manufacturers sometimes receive lines of credit from banks to ensure they have access to cash while they wait to recoup money from leased cars. They issue auto-lease bonds to either pay down those lines of credit, known as warehouse facilities, or ensure they aren’t needed. Over the years, Tesla has steadily increased the size of its warehouse facility to $1.1 billion, while its annual leasing revenue rose from $133 million in 2014 to more than a $1 billion last year. As of Sept. 30, it had drawn nearly $660 million from the facility, up from roughly $500 million three months earlier. Beyond its larger size, Tesla’s new batch of auto-lease bonds differs from its first one in important ways, investors and analysts said. The leases in its collateral pool are, on average, further away from maturity—meaning there is more time for things to go wrong before investors get their principal back. On the other hand, only 54% of the cash flow that will pay off the bonds is expected to come from car sales when leases come due versus 67% in the first deal, according to Moody’s Investors Service. That is a comforting proposition for investors given the uncertainty of future auto resale values. READ MORE Elon Musk Lobs New Criticism at SEC (Dec. 9) Tesla Replaces General Counsel With Seasoned Trial Lawyer (Dec. 6) Tesla’s Fundraising Options Get Thornier (May 13) Tesla Bonds Fall as Chief Accountant Resigns(Sept. 7) Heard on the Street: Tesla Wants Its Money Back (July 23) Investors who buy the bonds won’t be completely insulated from Tesla’s challenges. Few investors expect the company to go bankrupt during the life of the bonds, which mature starting in 2021. But in that worst-case scenario, it is possible that some customers could stop paying their leases and likely that the resale value of the cars would decline, hurting the debt’s value, some said. Investors are also betting that Tesla’s cars will be durable and popular enough that they’ll still be valuable when a large number of leases begin to expire toward the end of 2020. Overall, investors in the new deal are getting good compensation for the risk associated with Tesla, “particularly now that it seems to be doing better,” said John Kerschner, head of U.S. securitized products at Janus Henderson Investors. Bolstered by improved production of its new Model 3 sedan, Tesla flipped from cash-flow negative to cash-flow positive in the third quarter, generating $881 million to help lift its cash on hand to $3 billion at the end of September. Mr. Musk has said Tesla doesn’t need to raise more cash to fund its growth or pay off coming debt maturities, including $920 million of convertible bonds due in March. Potentially helping the company’s cash position, its stock price recently climbed above $359.87—the so-called strike price that determines whether the March bonds can be converted to equity. Tesla will need to pay down the bonds entirely with cash if its shares average below the strike price from Jan. 29 through Feb. 26. It recently notified holders of the notes that it would pay half the par value of the bonds in cash if the bonds are convertible and holders elect to make the conversion. The remainder would be paid in shares, with the total amount determined by how high the stock trades during the weekslong averaging period.