Tesla Stock Sells Off, But Watch The Bonds

(Bloomberg Gadfly) -- Tesla had a pretty terrible Tuesday, all things considered.

News emerged that the National Transportation Safety Board is investigating a fire involving a Model X that crashed in California last week. Meanwhile, rival Jaguar Land Rover announced it was teaming up with Alphabet Inc.'s Waymo unit to get the drop on autonomous electric vehicles.

This may have contributed to an 8 percent drop in Tesla Inc.'s stock, its worst decline since ... last month, when it reported underwhelming fourth-quarter results.

But the most interesting aspect of Tuesday's selloff was what happened with Tesla's bonds. Because while burning vehicles and rival robo-cars are problems, the real issue with Tesla is always the same: How to fund it.

Tesla's benchmark issue maturing in 2025 slumped by 3.6 percent -- which sounds small, but everything's a bigger deal in bond-land. It was easily the biggest one-day drop since the bonds were issued last August, taking the yield to 7.18 percent. That's a very important number for two reasons.

First, it's a spread of more than 440 basis points to the benchmark Treasury bond -- the highest yet for Tesla's issue:

Second, but more importantly, that spread pushes Tesla past its peers -- and not in a good way.

As I wrote back in August, Tesla's masterstroke with this bond was to repeat what had happened with its stock: namely, to get the supposed vigilantes of the fixed-income market to be just as sanguine about the company's risks as its shareholders. The $1.8 billion issue priced at a 76 basis point discount to the single-B average.

By Tuesday, the script had flipped, and while the whole single-B sector has sold off a bit in the past seven months, Tesla's bonds have now sold off more:

It's possible, of course, that Tesla's ardent fans -- of which there are many -- will pile back in.

Next week, the company is due to report first-quarter vehicle deliveries. It seems unlikely it will have hit the 2,500-a-week Model 3 production target it (re)set in January, which this week's sell-off likely anticipates.

On the other hand, if Tesla can artfully craft a late surge of momentum in production as the quarter ends, even if it doesn't get near the absolute target, then that might be all the divine signal the true believers need. After all, who can forget the "extrapolates to over 1,000" pitch of the January update?

Yet, even for them, the drumbeats emanating from the bond market must be getting hard to ignore.

Late on Tuesday, Moody's downgraded those Tesla bonds to Caa1 (the company rating went down a notch to B3). Moody's could hardly do otherwise, given the single-B rating had been predicated on Tesla producing 300,000 Model 3s this year at a 25 percent gross profit margin, both of which now look hopelessly out of reach.

The Triple-C corporate-bond pool is priced north of 11 percent, suggesting Tesla's yields have plenty of room to spike further if next week's figures confirm Model 3 output is still backfiring.

As I wrote here last week, challenges on the factory floor and the balance sheet are converging. Drawing inexorably closer to a refinancing wall, Tesla needs a real shot of confidence, and capital, to keep its money machine turning over this year.

Given Tuesday's bond blowout, that almost certainly means tapping the equity market again. Nothing like being a motivated seller to put a floor under a stock price, right?

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

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