Wolf Richter: Tesla Slammed by Tesla (and Moody’s)

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? ReadPE Firm Cerberus Capital’s “Rollup” Collapses into Bankruptcy

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35 comments

  1. kimyo

    Elon Musk,

    the billionaire tech entrepreneur, announced Thursday on Twitter that he has received “verbal” government approval to build a high-speed underground transportation system from New York to Washington, with stops in Philadelphia and Baltimore.

    at least delorean gave us a bit of unique, relatively non-flammable, motoring history. musk’s only accomplishment is having parlayed his monorail pitch into an astonishing amount of government and investor cash.

    for the record, every single nasa space shuttle was launched with re-usable boosters. according to musk, ‘two or three falcon heavies would equal the payload of a saturn v’. i don’t see how this is progress. paul allen’s stratolaunch seems like a much more effective solution.

    Elon Musk is Officially Sending Humans to Mars in 2024

    at the equator, on mars, typical night time temperatures are -100F. roughly 30F colder than average temps in antarctica. given current technology, putting humans on mars is not possible. even the simplest challenge, providing them with drinking water, remains unsolved.

    lastly: in the california crash the fire department had to stand aside. will they have to do the same in the case of a house fire involving a lithium-ion powerwall™? how will they respond to a house fire when there’s a model s parked in the garage?

    Reply
    1. zer0

      Whenever I hear Musk and others like Hawking talk about colonization of other planets as “the only solution”, I begin to think we have hit an era of peak stupidity. So stupid that even the greatly acclaimed “geniuses” are ignorant and more annoyingly arrogant. As if any of them spent time in a lab actually doing research. Talk to anyone dealing with the real, not theoretical, and they will immediately claim they are NOT experts (because they know how hard it is to even predict how friction works at a macroscopic level), yet talk to those dealing with the theoretical and they will act as if they know everything there is because some numbers added up.

      Fact of the matter is, we evolved on earth and we will either succeed or die on this planet. There is no way in hell we will make it in space. Let me give everyone a rundown of what space has to offer:
      1) High radiation, enough to permanently alter your genome
      2) Low gravity, which wreaks havoc on organs, eyes, the brain, etc, so much so that NASA has strict limits on time spent in space (you will go blind eventually, your bones will disintegrate, and you will suffer intense headaches and nausea as fluid builds around your brain)
      3) Temperature extremes that can barely be met by our current material engineering, especially over long durations
      4) Long distances. So long it can take years or months for radio waves to travel back to Earth even from within our own solar system

      None of this seems better to me than even the most apocalyptic version of Earth.

      Reply
      1. Synoia

        1) High radiation, enough to permanently alter your genome

        Only send Seniors.

        2) Low gravity, which wreaks havoc on organs, eyes, the brain, etc, so much so that NASA has strict limits on time spent in space (you will go blind eventually, your bones will disintegrate, and you will suffer intense headaches and nausea as fluid builds around your brain)

        Spin the spacecraft habitat.

        3) Temperature extremes that can barely be met by our current material engineering, especially over long duration

        What has long duration have to do with insulation and heating? To dwell in space the space dwellers need to become independent of resources at the bottom of a large gravity well relatively quickly. That means mining, refining and manufacturing.

        4) Long distances. So long it can take years or months for radio waves to travel back to Earth even from within our own solar system

        True.

        Under the current regimes on the Planet I sincerely doubt the Human race will survive. The combination of agriculture exhaustion, climate change and limited resources will end life as we know it.

        If we are to become space-faring, then we need to evolve to that. That involves genetic engineering. Humans are currently evolved are suitable for the bottom of this gravity well.

        Reply
        1. False Solace

          > Under the current regimes on the Planet I sincerely doubt the Human race will survive.

          How does the right solution involve exporting the problem to multiple new places? To me that’s the answer of a cancer cell, not a responsible thinking species.

          Reply
      2. Stephen Gardner

        It’s our fault. We have let people think that if they earn billions of dollars they are smarter than anyone else. Elon Musk has a BSc. in Physics and a BSc. in Economics. After getting his two bachelors he went to California to start a PhD in Physics. He left after 2 days. But because he has acquired billions of dollars (not saying he did or did not earn them–that’s not the point) he is allowed to be thought of as an expert. I think it is wrong to pronounce Hawking’s name in the same sentence with Musk. Hawking not only finished his PhD under some pretty dramatically harsh conditions but he has a long history of thinking about space. And Hawking didn’t say he would personally send people to space. Musk is a shallowly educated huckster who has managed to get other people to pay for his adolescent science fiction fantasies. And because he is rich people listen to him when they shouldn’t. His high speed trains are as implausible as his Mars launches but our wealth and technology worshiping culture rewards adolescent dreams that have a patina of technology and science about them. Smart money is sometimes pretty dumb.

        Reply
  2. Ken

    Wow! All this credit ratings corruption by Moody’s during the GFC and people still give it credence. We really are a hopeless species.

    Reply
    1. Yves Smith Post author

      This is an ad hominem attack, which is an intellectually invalid rhetorical gimmick, and explicitly against our written site Policies. If you think the downgrade is not valid, you need to argue why and not engage in lazy drive-bys.

      Moreover, you seem to forget the problem is the rating agencies before the crisis was that they were too slow to downgrade. They are pretty much never guilty of being too aggressive. And on tope of that, they screwed up on extremely complex structured products, not plain vanilla corporate bond ratings. So you trying to attack this downgrade using the crisis as a justification verges on comical.

      Reply
      1. Ken

        Very surprised coming from you,Yves. Have you forgotten the pay for ratings scandal? Or their continuous fear mongering about public debt about sovereign countries that supported austerity policies?

        Reply
      2. ebbflows

        Yes it is a self inflicted image problem, acerbated by what transpired after the xerox machine, where one could preferably walk down the street for a better rating.

        So on one hand I agree with you YS, argument is over done based on RA alone, yet that does not deal with RA functionality in decision processes due to performance track record. Aside I don’t need a rating agency to inform about what is wrong with Testra.

        Reply
        1. Arizona Slim

          Even worse, their cars look pretty generic. I mean, come on. If I’m going to pay that kind of money for four wheels and a motor, I want style. Like a Maserati or a Ferrari.

          Reply
      3. Simon

        What’s wrong with distrusting an organisation who regularly has proven themselves to be untrustworthy? Should we really be giving them any credence considering they don’t give two schmucks when supporting austerity and down grades of fully mmt compliant countries? Agree with Ken here.

        Reply
    2. Norb

      What is more amazing is the fact that common citizens still believe Elon Musk is a visionary worthy of support and admiration. When I see these downgrades, that is what first comes to mind, not a criticism of Moody’s actions. This misplaced trust allows investments and pensions to be looted more than anything else. Continuing to promise, and never truly delivering is the mark of a con artist.

      While tragic, exploding batteries and driver-less cars running down pedestrians might just shock more people out of their hi-tech trances. All for he larger good.

      Reply
      1. Stephen Gardner

        Yeah, it all comes around doesn’t it? The bloom is off the technology rose. I’m an engineer myself but I have to say that I can’t for the life of me understand why people put such childlike faith in bold technological solutions to non-problems. Driver-less cars? Do we really need fewer jobs?? Is making cars drive themselves or using AI to hone advertising to a razor sharp point really more important than all the other challenges to life on earth that could be approached with good engineering? I don’t think so but this is the epoch of the salesman. We even have one in the White House.

        Reply
        1. Norb

          Craftsmanship, working in concert with purposeful engineering, seems like the best possible world. The greatest satisfaction must come from actually solving problems and successfully providing solutions through their implementation. The ethic of Planned Obsolescence runs contrary to that notion- and will ultimately lead to the destruction of all if not abolished. All that talent and energy pouring down a black hole- in the name of profit.

          I am of the opinion now, that if humanity cannot first secure a proper relationship with life on this planet, we have no business looking to the stars. The hubris and cluelessness is staggering.

          A return to shop and home economics classes, along with the more scientifically challenging disciplines related to engineering, seem necessary for a free democratic society. The full spectrum of citizens talents must work in concert with each other. A nation, in order to survive, must be a manufacturing nation.

          All that has been dismantled, and the politicos wonder why there is social tension and the nation is in decline.

          Any hope of survival for those not blinded by the current system will seek to create that relationship anyway they can. It’s that , or get left behind or eventually cast aside as just another obsolete article.

          Reply
  3. Dean

    It takes a bold visionary to create new markets.

    Someone who’s not afraid to sell to the world a vision of the future. Their vision of the future.

    Someone who’s not afraid to tweet. Constantly.

    Someone who’s got a spare car to launch to Mars. Or wherever it’ll end up.

    Someone who’s not afraid to use other people’s money. Repeatedly.

    Someone to keep our collective mouths salivating for the “next big shiny tech thing” and Silicon Valley’s hopes alive for a richer valuation in the next round of funding in spite of the dismal fundamentals.

    Elon Musk is that someone.

    Reply
    1. Duke De Guise

      That’s all very nice, but Dude, the chicks at Elon’s bars and nightclubs on Mars will be wicked hot!

      Reply
      1. Edward E

        Somehow it doesn’t seem like restaurants, bars and nightclubs on Mars will have that special atmosphere.

        Corporations will never buy a loss making, cash burning, debt-laden company facing stiff competition. Virtually no hope of someone acquiring Tesla. They will just wait to pick up firesale assets and shareholders will get zero. All those pre-ordered Tesla sparky semi-trucks will probably never get delivered either.

        Reply
        1. Duke De Guise

          You’ve got to have faith, Edward E, you’ve got to have faith.

          Isn’t that what this is all about?

          Reply
    2. oh

      Unfortunately, in view of the various projects that depend on government grants and subsidies and lack of follow through on any of his “visionary” projects, he looks more like a snake oil salesman to me!

      Reply
  4. Altandmain

    I think that the big issue is that folks in Silicon Valley tend to look down on manufacturing. Musk and the other Silicon Valley robber baron types underestimated the challenges that it would take to become a serious automotive manufacturer.

    One of the things that I once noted when I was in NYC was how people in Manhattan tended to think that they were better than people in Staten Island and Upstate NY, simply because they were a part of the society called “creative economy”, while they saw the working class as being in a “legacy manufacturing economy”. I think that Silicon Valley has made similar mistakes. For all their flaws, as noted, nations like Germany and Switzerland seem to have a much better respect for manufacturing.

    As for Musk, he made many unforced errors, not the least of which is showing humility. It is impossible to know what is happening without talking to the engineers on the factory floor, who are likely under NDAs,, but I can guarantee you that when a company messes up like this, senior management is the biggest problem.

    Another thing that I noticed when I saw a Model S. Quality control is horrible. Panel gaps are as bad as the cars made in the 1970s. These have carried over to the Model 3. Apparently there are paint and rust issues with a car that has been just released. There are touchscreen issues. Basically the car has very poor quality control.

    A lot of this can be chalked up to Musk and his disdain for traditional validation techniques used as standard.

    http://wardsauto.com/industry/tesla-s-hiccups-devil-details

    Knowledgeable sources say Tesla’s Model 3 launch has been hampered by all manner of problems, some self-inflicted because of Musk’s disdain for using development and production processes honed by traditional auto makers.

    Most importantly, Tesla bypassed production prototyping typically used by auto makers to catch glitches before gearing up for high-volume output and instead sought to save time by using a “pilot line” to check out processes. “Using prototyping you can make changes and it doesn’t cost as much,” says one source. Business Insider reports that skipping prototyping “could spell trouble down the road.”

    Another source, who has first-hand knowledge of the situation, says Tesla chose to use its own methods to prep for production rather than rely on traditional validation processes. “There have been a lot of hiccups,” the source says, “because everything they do is ass-backwards. They aren’t used to this kind of (high-volume) operation. There are no standards.”

    What a mess.

    Oh and if anyone is interested in buying a Tesla, my advice is to avoid the first 2 or 3 years models and see what happens. The panel gaps may be merely scratching the surface of the problems with this car.

    Reply
  5. XXYY

    “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.”

    Yeah, but it’s *Elon Musk*, don’t you get it? The rules don’t apply! He’s going to Mars, for God’s sake. He just launched his own car into space; how cool is that! That reminds me, I have to go put down a deposit on a Tesla.

    I have watched in some amusement as Tesla has struggled with its foundering manufacturing operation and apparently made no headway at all. One of the big lessons of the 80s and 90s is that manufacturing is an extremely demanding and unforgiving discipline in its own right. But there are certainly people alive in the world who know how to do it. I would think Musk would be able to buy his way out of this situation by hiring an experienced staff to design and run his assembly operation. Maybe the necessary changes would require months of shutdown time and he can’t afford the bad optics at this point.

    Tesla is also a great case study on the vast distance between an intriguing prototype and a mass produced product. The appreciation of this distance is unfortunately lost on most people, including corporate executives and customers. It’s tempting to please everybody by going along with the notion that “its almost done”, when in fact you are just starting on a really long road. I worked at one company that was ultimately bankrupted by these kinds of issues.

    Reply
    1. Stephen Gardner

      You say: “But there are certainly people alive in the world who know how to do it. I would think Musk would be able to buy his way out of this situation by hiring an experienced staff to design and run his assembly operation. Maybe the necessary changes would require months of shutdown time and he can’t afford the bad optics at this point.” I suspect the real problem is that hiring experienced staff would involve admitting that he isn’t smarter than everyone else–especially those guys in Detroit. That is not possible for our narcissistic tech moguls. I mean after all, did any of those guys that built Detroit plan a Mars launch? I didn’t think so. So how are they qualified to run an auto assembly line? ;-)

      Reply
  6. The Rev Kev

    The whole saga with the Tesla Model 3 is starting to remind me of the story of the F-35 fighter. No, no, seriously. The way that that fighter has been built was with the idea of concurrency. That is, you are building it as you design it though that means that you have to go back and rework every single model ever built to bring it up to standard. I may be wrong but I think that something similar is happening with the Tesla cars. Certainly a lot of people had faith in the Model 3 as by July of last year, 500,000 had reserved this car model for themselves. From what I can see, the problems in production may also stem from rushing a car into production before the prototype was ironed out.
    I have read that it is hard to determine how many of these cars have been made so that Bloomberg came up with their own Tesla Model 3 Tracker (https://www.bloomberg.com/graphics/2018-tesla-tracker/) to find out. They seem to be using mostly VIN numbers to do this. Don’t know if this is true or not but apparently Elon Musk has to go out next week and state how many Model 3s the company has made. If true, he may be feeling under the gun at the moment. Time will tell.

    Reply
  7. barrisj

    Mish is all over Tesla today…speculating on bankruptcy, and “fraudulent conveyance” of Solar City bonds held by Musk and his cousins into Tesla bonds, under far better terms than other bondholders could have gotten…hmmm. Tesla has a lot of paper coming due in the next year or two, and Musk seems to believe that rockets to Mars are sufficient to get lenders to keep turning over the loans…what’s wrong with this picture?

    https://www.themaven.net/mishtalk/economics/tesla-bankruptcy-fraudulent-conveyance-9BnM1tHOF0Gn5FEzX8eGIw/

    Reply
  8. Synoia

    OK, let’s presume Tesla has valuable technology, and goes Bankrupt.

    Which automobile company buys the assets?

    If Tesla was priced based on revenue, instead of expectations, it probably would have been acquired.

    Tesla is not going away. At the right price, there could or would be an acquisition.

    Reply
    1. Jim Haygood

      How the BK scenario could play out:

      It seems that Tesla will have cash losses of between $3 and $6 billion this year, along with another $4 to $6 billion or so of cap-ex. Let’s call it a clean $10 billion of cash needs. Based on current burn rates, they should run out of money sometime late this summer.

      http://adventuresincapitalism.com/2018/03/29/tesla-learns-reflexivity/

      Haven’t gone through Tesla’s annual reports and filings. But its liquidation value based on a multiple of assets likely would be far, far below today’s share price.

      Reply
      1. pat b

        They can slash the burn rate. Stop the GigaFactory.
        Focus on fixing the Model III.
        only build out a few more superchargers. The network has done it’s job, the rest of the gains are marginal.

        Slow down the SEMI.

        work on improving QA.

        Reply
    2. Altandmain

      Hard question, but do they have anything valuable in terms of technology?

      The IP around the batteries is owned by Panasonic. Their main competence has been to package batteries.

      Everything else the rest of the automotive industry has. Electric Motors are a common technology.

      Reply
  9. Jim Haygood

    Ignored warnings:

    Walter Huang’s brother, Will, makes a startling claim — that before the crash, Walter complained “7-10 times that the car would swivel toward that same exact barrier during auto-pilot. Walter took it into dealership addressing the issue, but they couldn’t duplicate it there.”

    http://abc7news.com/automotive/i-team-exclusive-victim-who-died-in-tesla-crash-had-complained-about-auto-pilot/3275600/

    And he kept driving it on autopilot after it repeatedly lurched toward the barrier?

    Sounds like a sad case of a Silicon Valley coder drinking his own Kool-Aid.

    Reply
    1. JerryDenim

      Wowsers. What a story. It’s incredible people are willing to trust their lives to a very new technology with a track record of fatalities. Even more astonishing they would do so after they were aware the technology was malfunctioning in a manner that was likely to be fatal.

      Releasing a buggy, unperfected, automated car to the general public without proper training and without stressing the full extent of the system’s short-comings was a wildly reckless and cynical move on Tesla’s part. Fine print and disclaimers can’t undo the perceptions or the hazards created by marketing an autonomous driving feature called “Auto-Pilot”. At the time I couldn’t believe Tesla’s corporate counsel would sign off on it. If Tesla’s finance and manufacturing woes don’t bankrupt them, then they deserve to be bankrupted by the lawsuits and regulatory fines related to their self-crashing, murderous cars.

      One more entry for the autonomous vehicle “There Will Be Blood” header.

      Reply
  10. RBHoughton

    I think he needs to get the production rate up and the other problems will diminish. Its a labor problem. People have faith in the product and recognise what the other motor traders are trying to do. Just make cars at a faster rate and Musk’s supporters will be satisfied.

    Reply
  11. pat b

    yves.

    I think Tesla has a few things going for it.

    Global Brand, world wide supercharger network. Lots of great tech.

    The stock may take a pounding but they can probably continue.

    Reply
  12. George Phillies

    “4) Long distances. So long it can take years or months for radio waves to travel back to Earth even from within our own solar system”

    Complete and total nonsense. Radio waves cross the solar system in hours. Earth to Mars is minutes.

    In four years, radio waves reach the star Alpha Centauri.

    George, D.Sc. (Physics) MIT, 1973.

    Reply

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