By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street
When will investors get tired of feeding their capital into this cash-burn machine?
Tesla shares plunged 8.2% during regular trading hours on Tuesday and another 2% in after-hours trading to $272.50, below where they’d been a year ago ($277.45), and down 28% from September 18, when the market still had hopes for the Model 3.
The unsecured junk bond due in 2025 with a 5.3% coupon – which Tesla sold last August when its stock was still over $357 a share – dropped to a record low of 89 cents on the dollar in after-hours trading.
During a nasty day on the stock market, wunderkind Tesla got hammered by Tesla reality.
At First It Was the NTSB
The National Transportation Safety Board announced that it was sending investigators to California to investigate the fatal and fiery crash of a Model X on Friday morning that had shut down a carpool ramp and two lanes of Highway 101, the Silicon Valley artery, for almost six hours, twice as long as most accidents of this type, according to the California Highway Patrol. NTSB said it would examine various issues, including the post-crash fire and removing the vehicle from the accident site.
This is the second NTSB field investigation into the crash of a Tesla this year. In January, the NTSB opened an investigation into the crash of a Tesla — apparently in semi-autonomous mode — and a fire truck.
In the accident on Friday, the Model X hit a freeway divider, then was hit by a Mazda, and crashed into an Audi. The lithium-ion cells caught fire. The driver of the Tesla perished. The fire department ended up calling Tesla to determine how to extinguish the fire, as the exposed batteries were also an electrocution hazard.
Then It Was Moody’s.
During after-hours trading, Tesla got hit on the credit side with a resounding downgrade from Moody’s, which specifically:
- Cut the corporate credit rating by one notch to B3, just above deep-junk Caa1.
- Cut the unsecured-note rating one notch to Caa1
- Cut the Speculative Grade Liquidity rating to SGL-4 from SGL-3.
- Changed the outlook from stable to “negative.”
Moody’s cites these reasons:
Tesla’s ratings reflect the significant shortfall in the production rate of the company’s Model 3 electric vehicle.
Tesla produced only 2,425 Model 3s during the fourth quarter of 2017; it is currently targeting a weekly production rate of 2,500 by the end of March, and 5,000 per week by the end of June. This compares with the company’s year-earlier production expectations of 5,000 per week by the end of 2017 and 10,000 by the end of 2018.
These are just Tesla targets. Tesla never hits its targets. It overpromises to hype its shares. It didn’t overpromise, however, its “manufacturing hell,” as CEO Elon Musk put it so eloquently. And the few Model 3s now driving around out there appear to be beta-versions with scads of quality problems. Moody’s goes on relentlessly:
The company also faces liquidity pressures due to its large negative free cash flow and the pending maturities of convertible bonds ($230 million in November 2018 and $920 million in March 2019).
The negative outlook reflects the likelihood that Tesla will have to undertake a large, near-term capital raise in order to refund maturing obligations and avoid a liquidity short-fall.
Tesla has a lot of debt. Among the $23 billion in liabilities are: $10.2 billion in long-term debt and $854 million in customer deposits, according to its annual report. Tesla also had considerable liquidity at the end of December, including $3.4 billion in cash and securities, and a “moderate availability” under its $1.9 billion asset-based loan facility (some of which has been burned up in Q1). But Moody’s says that this is “not adequate to cover:”
1. The approximately $500 million in minimum cash that we estimate Tesla must maintain for normal operations;
2. A 2018 operating cash burn that will approximate $2 billion if Tesla maintains high discretionary capital expenditures to increase capacity; and
3. Convertible debt maturities of approximately $1.2 billion through early 2019.
These cash needs will likely require Tesla to undertake a near-term capital raise exceeding $2 billion. Moreover, if the company maintains its expected pace of expansion, it will likely need to raise additional capital during the second half of 2019.
Moody’s threatened that ratings could be cut even lower if:
- There “are shortfalls from its updated Model 3 production targets”
- And if Tesla “is unable to raise sufficient new capital to cover its late-2018 and early-2019 convertible maturities, and to cover the operating cash consumption that will likely continue into 2019.”
Standard and Poor’s rates Tesla B-, one notch above CCC, and on a par with Moody’s lowered B3 rating.
Despite the drop on Tuesday, Tesla’s shares are still inexplicably above the single digits, considering how much it loses year after year, for ten years in a row, with every sign pointing to even bigger losses going forward, and how much investor-cash it burns at an accelerating rate, year-after-year, and considering the endless false promises and hype and the truly amazing “manufacturing hell” that is unequaled among automakers.
Once the true believers in this stock finally walk away and the shares go where they belong, Tesla’s debt will get in trouble. The reason is simple: The entire premise of the creditors is that Tesla will always have a high share price, and so it can always sell more shares to raise more money to service its debt. But once issuing more shares becomes difficult in an unwilling market, creditors won’t be able to figure out how on earth (not Mars) Tesla is going to pay them interest and principal, with no new money coming in, while also burning several billions a year on its operations.
Once this powerful cash-burn machine can no longer fuel itself by selling new shares and new debt, it’s a scenario for default. Moody’s would then slap a “D” rating on the company and its debt, by which time most investors have already watched their capital go up in smoke.
Bankruptcy is becoming an increasingly common “exit” from leverage buyouts that private equity firms undertook during the boom before the Financial Crisis. And the pension obligations? Read… PE Firm Cerberus Capital’s “Rollup” Collapses into Bankruptcy