Tesla’s plunging bonds signal investor worries that it will run out of cash

Elon Musk’s creditors are suddenly having a serious bout of buyer’s remorse.

In August, they lined up for the chance to finance Tesla Inc.’s ambitious rollout of its Model 3 sedan. Wooed by Musk’s personal appeals, bond investors pretty much ignored the carmaker’s prolific cash burn and repeated failures to meet production targets and lent it $1.8 billion at record-low interest rates.

But now, after a spate of fresh setbacks in the last week, including a fatal Tesla crash and a credit-rating downgrade, bondholders are asking hard questions about whether Musk can deliver on his bold promise to bring electric cars to the masses before the company runs out of cash.

On Wednesday, Tesla’s notes plunged to a low of 86 cents on the dollar, the clearest sign yet that creditors aren’t totally sure the company will be money good.

“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.”

The consequences are significant. Tesla’s woes have played out most visibly in the stock market, with its shares suffering a two-day, 15% drop that’s the biggest since 2016. But surging borrowing costs, which are now near 8%, could hamper the carmaker’s ability to finance itself at a crucial time.

A representative for Tesla didn’t immediately respond to an emailed request for comment.

The company, which has never shown an annual profit in the 15 years since it was founded, will need to raise more than $2 billion to cover not only its cash burn this year but also about $1.2 billion of debt that comes due by 2019, Moody’s Investors Service analyst Bruce Clark said in a report Tuesday.

Tesla is burning through money so fast that, without additional financing, it would run out of cash before year-end. To put that into perspective, that amounts to more than $6,500 every minute of every day, according to data compiled by Bloomberg.

That puts the company in “crunch time” now to improve margins, Cowen & Co. analysts led by Jeffrey Osborne said in a note Tuesday. Tesla will report first-quarter production figures for the Model 3 early next week. Although the company has said it expects to end the quarter making 2,500 Model 3s per week, analysts are skeptical.

“Based on our own checks as well as user reported registration data found online, Tesla’s Model 3 ramp is likely still moving slower than management’s previously pushed out targets,” Osborne wrote.

Another production miss wouldn’t make it any easier for Tesla to persuade bond investors to hand over more money. Although shareholders just approved a massive pay package for Musk potentially worth $2.6 billion, three executives have headed for the exits this quarter, including two from the company’s finance team.

“People are looking at the abyss here. They’re looking at it spiral out of control,” said Jack Flaherty, a portfolio manager at GAM Holding. “It’s definitely on the precipice.”

To Diamond Hill’s Zox, who didn’t buy Tesla’s bonds last year, yields are still too low to offset the risks of lending to a business in its early growth phase. They would need be 10% to 12% to get him interested.

And with a junk rating of Caa1 from Moody’s on Tesla’s unsecured bonds (seven levels below investment grade), coming back to the market might prove to be too onerous in any case, says Bloomberg Intelligence’s Joel Levington.

The company might need to consider selling equity, issuing convertible bonds and structured debt or taking out bank loans, he said.

“I would think it’d be off the table,” said Levington, referring to another unsecured bond sale. “They have to look at all options.”