Shares of Tesla extend their plunge after Moody’s rating downgrade

U.S. two-dollar billsPhoto by Leslie Shaffer

Shares of Tesla plunged 7.34 percent to US$258.69 by 10:40 P.M. SGT/10:40 A.M. ET, extending Tuesday’s 8.2 percent tumble.

While the stock was likely already teetering, Moody’s downgrade of the company’s corporate family rating to B3 from B2, with a negative outlook, likely gave it a push over the edge.

It hasn’t helped that the U.S. National Transportation Safety Board is investigating a Tesla crash in California earlier this month; the car reportedly struck a highway barrier and caught fire.

In a release issued late on Tuesday, the ratings agency said the downgrade was on the “significant shortfall” in production of the Model 3 electric vehicle.

Moody’s noted only 2,425 Model 3 units were produced in the fourth quarter of last year and that Tesla was targeting 2,500 a week by the end of March and 5,000 a week by the end of June. That was down from Tesla’s guidance a year earlier for 5,000 a week by the end of 2017 and 10,000 by the end of this year, Moody’s noted.

Additionally, Moody’s pointed to the company’s difficult combination of large negative free cash flow and pending maturities on its convertible bonds — US$230 million in November 2018 and US$920 million in March 2019.

Cash call ahead?

“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 said. “Prospects for addressing its liquidity requirements (whether equity, convertible notes or debt) will be supported if the company can establish credibility for reaching Model 3 production levels.”

It noted that Tesla’s liquidity is mostly US$3.4 billion in cash and securities, as of the end of 2017, and “moderate” availability under a US$1.9 billion ABL facility.

Moody’s said that’s not adequate to cover the minimum of around US$500 million in cash the ratings agency estimates Tesla needs for normal operations, the estimated US$2 billion Tesla needs to maintain high capex to increase capacity and the convertible debt maturities of around US$1.2 billion.

“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 said.

It warned the rating could be cut further if Tesla has further shortfalls in Model 3 production or if it can’t raise the funds to cover its upcoming debt maturities and operating cash consumption.