Tesla Stock Price Dives After Moody's Downgrades Credit Rating Over Model 3 Delays, Liquidity Concerns

Tesla has been Wall Street’s fair-haired boy as the electric car startup’s share price soared over the past few years. Production figures have not kept pace with Tesla’s market cap, and now problems getting assembly up to speed on the company’s vitally important Model 3 and concerns about its cash burn have resulted in a downgrade of its credit rating from Moody’s Investor Service. That report from Moody’s was issued late on Tuesday.

When trading began on Wednesday morning, Tesla stock opened at $264.76, down 5 percent from the day before. That is almost 14 percent lower than it was at the beginning of the week, and 31 percent lower than in September of 2017, when Tesla’s stock price apparently peaked at $385 a share.

Tesla’s overall credit rating was dropped from B2 to B3, which is six grades below investment level, and Moody’s said its outlook on the company is “negative.” Moody’s analyst Bruce Clark said, “Tesla’s ratings reflect the significant shortfall in the production rate of the company’s Model 3 electric vehicle. The company also faces liquidity pressures due to its large negative free cash flow and the pending maturities.”

Moody’s report went on to say, “Tesla’s ratings reflect the significant shortfall in the production rate of the company’s Model 3 electric vehicle. Tesla’s rating could be lowered further if there are shortfalls from its updated Model 3 production targets.”

The $1.8 billion in senior unsecured bonds that Tesla issued in August 2017 were downgraded by Moody’s from B3 to Caa1, well into junk bond territory — what the firm considers “very high credit risk, poor standing.” That resulted in a drop Tuesday evening of 3.5 cents on the dollar to 89 cents. At the time that debt was issued, demand was strong enough that Tesla only offered 5.3 percent interest, a record low for Tesla bonds. Now investors seem to be turning away from the EV startup.

The automaker continues to miss production level targets. Bloomberg estimates Tesla is now building about a thousand cars a week after saying that it would hit 2,500 units weekly by this time, the end of the first quarter of 2018. Tesla head Elon Musk predicted Model 3 production would hit 5,000 vehicles a week sometime this year.

In addition to failing to meet production goals, Moody’s said Tesla is facing financial hurdles. The credit rating agency claims the automaker will have to soon “undertake a large, near-term capital raise in order to refund maturing obligations and avoid a liquidity short-fall.” More than $2 billion will reportedly have to be raised by Tesla to meet those needs. The bonds in question mature in 2025.

Moody’s pessimism was echoed by Hitin Anand, senior analyst at CreditSights. “Why would anybody buy the bonds? There is just no reason to buy the bonds. You’re taking up equity-like risk and all you’re getting is a 5.3 percent coupon.”

Anand said that Tesla could possibly seek secured loans or issue notes convertible to equity in order to meet cash needs.

Tesla critics’ bleak forecast was countered by venture capitalist Jason Calacanis, who owns shares in the company (as well as a Model 3 he somewhat contradictorily claims to daily drive in self-driving mode). “Tesla is going to come roaring back,” Calacanis told CNBC. “Everyone who loves Tesla products can’t shut up about them because they are the greatest cars on the road.”

Greatest cars on the road or not, if Tesla cannot get production of the Model 3 up to anticipated levels, you can expect its credit rating and stock price to drop further.

[Image: Bloomberg]