Tesla credit rating cut by Moody's on production issues, liquidity concerns

Tesla Inc.’s credit rating was downgraded by Moody’s Investors Service on Tuesday as the electric car company burns through cash, fails to meet production expectations and may soon have to raise more than $2 billion.

Moody’s cut Tesla’s overall rating to B3, or six levels below investment grade, from B2 and said its outlook on the company is negative. Tesla’s $1.8 billion of senior unsecured notes, issued in August, were downgraded to Caa1, seven steps into junk, from B3.

“Tesla’s ratings reflect the significant shortfall in the production rate of the company’s Model 3 electric vehicle,” Moody’s analyst Bruce Clark said in the report. “The company also faces liquidity pressures due to its large negative free cash flow and the pending maturities.”

A representative for Tesla declined to comment.

Moody's action also comes in the wake of the National Transportation Safety Board opening an investigation into a fatal Tesla crash in California earlier this month. 

It’s a reversal for CEO Elon Musk who convinced debt buyers less than eight months ago to pay a record-low yield of 5.3 percent on Tesla’s debut bond sale amid high demand. Investors have since dumped the bonds on skepticism about Tesla’s long-term outlook. Bloomberg’s Model 3 production tracker estimates the company may be making about 975 of the cars a week, a far cry from the end-of-quarter target of 2,500 per week.

‘High risk’ 

The unsecured bonds dropped 3.5 cents on the dollar to an all-time low of 89 cents on the dollar at 5:01 p.m. in New York, according to Trace bond price data. The new rating reflects “very high credit risk, poor standing,” according to Moody’s definitions. Before the ratings decision was announced, the company’s shares fell 8.2 percent to the lowest in almost a year as analysts cast doubt on its ability to reach production goals.

Tesla shares plunged another 7.7 percent to close at $257.78 on Wednesday -- the lowest close for the stock in 52 weeks. 

While Tesla continues to benefit from strong market acceptance of its cars and growing regulatory support, there’s a risk that Tesla has to “undertake a large, near-term capital raise in order to refund maturing obligations and avoid a liquidity short-fall,” Moody’s said. The company’s cash needs may require a near-term capital raise of more than $2 billion, according to the credit firm.

“Why would anybody buy the bonds? There is just no reason to buy the bonds.” said Hitin Anand, senior analyst at CreditSights, about the company’s $1.8 billion of notes due in 2025. “You’re taking up equity-like risk and all you’re getting is a 5.3 percent coupon.”

Tesla may choose to issue convertible notes or tap the secured loan market to meet its capital needs, Anand said.

Moody’s said Tesla’s rating could continue to fall if the company continues to miss its Model 3 production targets, as well as if it’s unable to raise new capital.