The company logo is displayed on the side of a Tesla Motors Inc. vehicle in a . showroom in London, U.K. (Photographer: Chris Ratcliffe/Bloomberg)

Tesla Cut by Moody's on Production Issues, Liquidity Concerns

(Bloomberg) -- Tesla Inc.’s credit rating was downgraded by Moody’s Investors Service on Tuesday as the electric car company burns through cash, fails to meet production expectations and may soon have to raise more than $2 billion.

Moody’s cut Tesla’s overall rating to B3, or six levels below investment grade, from B2 and said its outlook on the company is negative. Tesla’s $1.8 billion of senior unsecured notes, issued in August, were downgraded to Caa1, seven steps into junk, from B3.

“Tesla’s ratings reflect the significant shortfall in the production rate of the company’s Model 3 electric vehicle,” Moody’s analyst Bruce Clark said in the report. “The company also faces liquidity pressures due to its large negative free cash flow and the pending maturities.”

A representative for Palo Alto, California-based Tesla declined to comment.

Tesla Cut by Moody's on Production Issues, Liquidity Concerns

It’s a reversal for Chief Executive Elon Musk who convinced debt buyers less than eight months ago to pay a record-low yield of 5.3 percent on Tesla’s debut bond sale amid high demand. Investors have since dumped the bonds on skepticism about Tesla’s long-term outlook. Bloomberg’s Model 3 production tracker estimates the company may be making about 975 of the cars a week, a far cry from the end-of-quarter target of 2,500 per week.

‘High Risk’

The unsecured bonds dropped 3.5 cents on the dollar to an all-time low of 89 cents on the dollar at 5:01 p.m. in New York, according to Trace bond price data. The new rating reflects “very high credit risk, poor standing,” according to Moody’s definitions. Before the ratings decision was announced, the company’s shares fell 8.2 percent to the lowest in almost a year as analysts cast doubt on its ability to reach production goals.

While Tesla continues to benefit from strong market acceptance of its cars and growing regulatory support, there’s a risk that Tesla has to “undertake a large, near-term capital raise in order to refund maturing obligations and avoid a liquidity short-fall,” Moody’s said. The company’s cash needs may require a near-term capital raise of more than $2 billion, according to the credit firm.

“Why would anybody buy the bonds? There is just no reason to buy the bonds.” said Hitin Anand, senior analyst at CreditSights, about the company’s $1.8 billion of notes due in 2025. “You’re taking up equity-like risk and all you’re getting is a 5.3 percent coupon.”

Tesla may choose to issue convertible notes or tap the secured loan market to meet its capital needs, Anand said.

Moody’s said Tesla’s rating could continue to fall if the company continues to miss its Model 3 production targets, as well as if it’s unable to raise new capital.

©2018 Bloomberg L.P.