[This story has been edited since publication to clarify that Uber has issued USD 1.2bn in driveby unsecured bonds, and not USD 1.4bn as originally stated. Changes have been made to the second paragraph.]

Uber’s upsized bond offering proves the allure of the company’s scale and sizeable equity cushion, said five sources following the deal. But the deal comes as the path to free cash flow that Uber mapped out last year appears increasingly rocky, they added.

The USD 1.2bn driveby unsecured bond is set to price at 7.5% and par, in line with talk. Alongside cash and convertible notes, the bonds will fund the company’s USD 3.1bn acquisition of UAE-based ridesharing company Careem.

The deal, led by Morgan Stanley, was upsized from the issuer’s initial target size of USD 750m. Uber’s existing USD 1.5bn 8% senior unsecured notes due 2026 traded today at 104.125 to yield 7.025%, in line with recent levels, according to MarketAxess.

Uber’s USD 1.13bn term loan due 2023, which it repriced last year to Libor+ 350bps, is currently quoted at 99.8/100.2, according to Markit.

The bond was announced a day after California’s senate passed a bill that could disrupt Uber’s business model by making it harder to label its drivers as independent contractors. The company is also facing a lawsuit in California over its resistance to the new legislation.

On an investor call Thursday morning, Uber executives said they expected the bill to pass, but denied it would automatically reclassify the employment status of their drivers, according to two sources close to the situation.

Uber has banded together with rival ridesharing company Lyft and food delivery company DoorDash to pledge USD 90m towards a separate bill. That bill would keep drivers as independent contractors, but increase their pay and benefits.

Despite Uber’s optimistic stance on the California legislation, some buysiders were surprised that the company went ahead with the new bond so soon after the bill advanced. Adding to the legislative concerns is mounting skepticism around Uber’s pathway to profitability, which weighed on its IPO earlier this year.

The company raised USD 8.1bn at a USD 82.4bn valuation, well below initial talk of a USD 120bn valuation. The stock currently trades at USD 34.07 for a USD 58bn market cap, down from its IPO price of USD 45 a share.

While Thursday’s bond deal came in line with price talk, several buysiders following the syndication echoed many of the concerns that dogged Uber’s IPO.

During marketing for its debut high yield bond last year, Uber said it expected to burn cash for at least three more years before achieving positive cash flow. That goal appears increasingly distant based on the company’s latest financials, sources said.

Over the last twelve months, Uber has generated negative EBITDA of USD 2.8bn, according to deal documents—a deeper loss than the USD 2bn of negative EBITDA it was reporting at the time of last year’s deal.

As of its 2Q19 earnings call, Uber expects to burn USD 3bn-USD 3.2bn of cash in 2019 and USD 3.3bn in 2020, sources said. By contrast, Uber was burning around USD 3bn of cash at the time of last year’s bond deal.

Some sources said Uber’s own cash burn projections seemed too bullish, noting the pressure on the company to invest in new technology and business lines.

Based on USD 3.2bn of negative EBITDA, USD 615m of capex and USD 378m of interest, Uber could burn USD 4.2bn in 2019, dropping to USD 3.8bn in 2020 based on USD 2.85bn of negative EBITDA and USD 560m capex, said two buysiders.

The company has USD 14.6bn of liquidity, through USD 12.5bn of cash and USD 2.1bn of revolver availability, the buysiders said. Nevertheless, sources said the company would likely have to continue tapping the bond market to fund its cash burn.

“Uber’s going to have to tap the market for a few billion dollars each year to keep up with its cash burn, if they plan to continue investing in other areas, which they do,” one of the buysiders said.

Some observers drew comparisons with Netflix, which has been a repeat high yield issuer for several years to fund its cash burn in its quest to dominate the streaming sector.

Netflix’s USD 1.9bn 5.875% senior unsecured notes due 2028 last traded today at 111.125 to yield 4.387%, in line with recent levels, according to MarketAxess.

Similarly, WeWork—which is also burning huge amounts of cash and has been under pressure from equity investor SoftBank to postpone its planned IPO—is reportedly considering tapping the high yield market on an ongoing basis.

WeWork’s 702m 7.875% senior unsecured bonds due 2025 are currently trading around par, according to MarketAxess.

Uber and Morgan Stanley declined to comment.

2019 Debtwire