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.
More importantly, Tesla has to scale up Model 3 entry-level sedan production, or start issuing $1,000 refund checks to hundreds of thousands of depositors — which would really put a crimp in the company’s cashflow.