UPDATE: Moody's downgrades Tesla's (TSLA) corporate family rating to B3, senior notes to Caa1; Outlook is negative
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(Updated - March 27, 2018 4:24 PM EDT)
Moody's downgrades Tesla's (NASDAQ: TSLA) corporate family rating to B3, senior notes to Caa1. Outlook is negative.
Moody's Investors Service downgraded Tesla, Inc.'s (Tesla) Corporate Family Rating (CFR) to B3 from B2, unsecured note rating to Caa1 from B3, and Speculative Grade Liquidity rating to SGL-4 from SGL-3. The outlook is negative.
Tesla's ratings reflect the significant shortfall in the production rate of the company's Model 3 electric vehicle. 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). 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.
The Caa1 rating of the unsecured notes reflects the junior position of the notes relative to the company's $1.9 billion secured credit facility.
Tesla continues to benefit from solid market acceptance of Models S and X, which collectively hold over a third of the US luxury market. In addition, third-party evaluations of the Model 3 remain favorable, consumer response to the vehicle is sound, and advance purchase reservations and deposits remain high. Finally, regulatory support for battery electric and zero-emission vehicles continues to grow.
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. 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 -- 2,500 per week by the end of March, and 5,000 per week by the end of June.
Tesla's liquidity consists principally of $3.4 billion in cash and securities at December 31, 2017. The company also has moderate availability under the $1.9 billion ABL facility. This liquidity position 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.
Tesla's rating could be lowered further if there are shortfalls from its updated Model 3 production targets. The rating will also be pressured if the company 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.
The rating could be raised if production rates of the Model 3 meet Tesla's current expectations and if the company maintains good liquidity.
The following rating actions were taken:
..Issuer: Tesla, Inc.
.... Probability of Default Rating, Downgraded to B3-PD from B2-PD
.... Speculative Grade Liquidity Rating, Downgraded to SGL-4 from SGL-3
.... Corporate Family Rating, Downgraded to B3 from B2
....GTD Senior Unsecured Regular Bond/Debenture, Downgraded to Caa1 (LGD4) from B3 (LGD4)
..Issuer: Tesla, Inc.
....Outlook, Changed To Negative From Stable
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Related EntitiesMoody's Investors Service, Tesla, Model 3
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