Tesla is burning through more than $6,500 of cash every minute and would run out of funds before year end without more financing, according to data compiled by Bloomberg.
Musk has proven adept at raising money before, but it's likely to be more expensive this time. The unsecured bonds Tesla sold just months ago are trading near record lows, and a similar sale is less likely because investors probably would demand a yield of at least 10 percent. That's almost double the 5.3 percent Tesla had to offer last time.
Alternatives include debt that can be converted to stock, which Tesla has issued several times before. The equity's volatility -- and thus its potential for gains -- could make this option worth more to a buyer, so the coupon wouldn't have to be as high, according to debt investors who are studying Tesla's financial situation. Tesla also has capacity to issue secured debt, which typically carries lower interest rates than unsecured bonds.
"This is a company about growth, and growth needs financing," said CreditSights analyst Hitin Anand, who estimates that Tesla will have to raise about $2 billion in the next six months, likely through a combination of equity and convertible debt. "You got lucky the first time around," on the unsecured bond sale, Anand said. "If you test the market a second time and it fails, that loses confidence and hurts the equity even more."
Philippe Houchois, an analyst at Jefferies Group who upgraded the shares to "hold" from "underperform" on Monday, sees Tesla skewing the mix of funds more toward equity than debt in its next capital raise. In an interview on Bloomberg Radio, Houchois said he expects Tesla will need $2.5 billion to $3 billion to fund the ramp-up of Model 3 production, with shareholders suffering some dilution as a result.
"Raising capital in those circumstances with what's happening on the bond side isn't easy," Houchois said.
Not that an equity raise, or convertible debt offering, would be easy either. Tesla's stock is fresh off one of its worst months ever. Some of Tesla's convertible bonds are now trading below par, a sign that investors are valuing the securities less like equity, said Peter Tchir, head of macro strategy for Academy Securities Inc. The scrutiny from fixed-income investors could blunt Musk's persuasive powers that helped sell the last bond issue.
"Credit is not a game," Tchir said on Bloomberg Television Monday. "This is going to be who comes and takes you to task for your mistakes."
Moody's now rates Tesla B3, five steps above default, with a negative outlook. But that's still far from a default warning. "If we thought bankruptcy were imminent, the rating would be lower," Moody's Clark said.