If you’ve followed the stock market this week, you’ve noticed that Tesla has had a very bad week.
Elon Musk’s electric carmaker has seen its stock plunge almost 20% since Monday as several headwinds have converged all at once.
The week started with shares dropping on news of a fatal crash involving a Model X SUV in California last Friday, an accident that killed the driver and intensified concerns about Tesla’s Autopilot safety features – though it remains unclear if the driver involved in the fatal crash had engaged the system before the incident. And now the NTSB is investigating the crash, which isn’t good news.
Tesla has been dogged by a growing concern on Wall Street about its ability to meet its production goals for the Model 3. Then came Tuesday’s downgrade of Tesla’s debt on Tuesday on concerns about the Model 3 production and a “liquidity shortfall.”
Moody’s downgraded Tesla’s rating to a B3, or six levels into junk. “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,” Moody’s analysts wrote.
And then Thursday, the company announced a voluntary recall of 123,000 Model S sedans, asking customers with cars built before April of 2016 to have their power steering bolts replaced citing “excessive corrosion” of the part in some cold climates where a particular type of road salt is used.
All of this bad news comes at a time when Tesla is facing increased competitive pressure from nearly every other carmaker on the planet, and a situation CEO Elon Musk himself has called “production hell.”
But amid the stock’s chaos, something even more concerning is occurring in the bond market. In fact, Tesla’s bonds are in free fall.
Last August, Tesla had a wildly successful bond offering, but it seems creditors are experiencing a bout of buyers remorse with bonds plunging to an all-time low of 86 cents on the dollar by Wednesday’s close.
The drop marks a sharp shift in sentiment for Tesla’s fixed-income offering, which was done at a record-low coupon for a bond of its maturity and low quality and was upsized to $1.8 billion from $1.5 billion because demand was so great.
Investor interest was so high at the time that it suggested that bondholders had few reservations about the company’s ability to keep its incredible cash burn in check. But as the price of the bonds sink, it can only be interpreted as investors losing faith that Tesla can deliver on its bold promise to bring electric cars to the masses before the company runs out of cash.
“It’s getting worse and worse every single day” for Tesla, said Bill Zox, chief investment officer of fixed income at Diamond Hill Investment Group. “That’s the nature of being in this negative feedback loop. Everyone is worried.”
And the consequences may be significant as surging borrowing costs, which are now approaching 8%, could dampen the carmaker’s ability to finance itself at a crucial time. In fact, Tesla is burning through money so quickly that, without additional financing, it will run out of cash before year-end.
Tesla’s increasingly perilous situation is precisely what caught the eye of Moody’s analyst Bruce Clark earlier this week as he downgraded the company’s credit rating to B3. By Clark’s calculation, the company will need to raise more than $2 billion to cover both its cash burn and the roughly $1.2 billion of debt coming due by 2019.
This means that the company will likely have to test the market again at some point. But with both the company’s bonds and stock plummeting, should it turn to the credit or equity markets? And what will happen after next week’s quarterly production update?
Those are two tough questions for Musk. The world will wait to see if he’s able to pull a rabbit out of his hat.