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Tesla bonds plumb new lows on Moody's downgrade

Tesla Inc.'s debut 5.3% notes due 2025, which priced at par in August 2017, again slid to new lows the morning of March 28, falling 1.5 points on the day to 87.5, according to MarketAxess. The latest move lower follows a Tuesday ratings cut by Moody’s alongside an outlook revision to negative from stable.

The rating agency lowered the electric-car manufacturer’s corporate and unsecured note ratings to B3 and Caa1, respectively, from B2 and B3, citing a “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),” Moody’s added in a Tuesday report. “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.”

Tesla bonds have been pressured over the last several months by lackluster earnings and concerns surrounding the issuer’s ability to meet Model 3 production targets, and most recently by reports this week of mounting short positions across the issuer’s capital structure and a Tuesday tweet by the National Transportation Safety Board that the agency is investigating the fatal March 23 crash of a Tesla Model X near Mountain View, Calif.

The 5.3% notes due 2025 have now fallen as much as 5.25 points week over week, and seven points from the start of the month.

Tesla said in a Tuesday blog post that the company does “not yet know what happened in the moments leading up to the accident” and that Tesla “does not have any idea what caused it,” adding that the company has been unable to retrieve the vehicle’s logs due to extensive damage caused by the collision.

Short positions against Tesla’s debut unsecured notes climbed past $280 million in November, per IHS Markit, before a spate of covering in December that drove prices to roughly 96.5. IHS Markit noted, however, that the remaining par value of roughly $251 million short this week accounts for more than 13% of the total issue amount.

In terms of quarterly shortfalls, Tesla’s adjusted EBITDA for the quarter ended Dec. 31, 2017, was reported at roughly $33.76 million, down 63.1% from analyst expectations, based on consensus data compiled by S&P Global Market Intelligence. Meanwhile, Tesla notes were also pressured in November 2017 on the rollout of third-quarter results, which indicated a downturn in free cash flow alongside an unexpected EBITDA loss.

Tesla placed its debut 2025 offering in August to bolster the company's balance sheet and for general corporate purposes ahead of the launch of Tesla’s Model 3, its first electric car designed for the mass market. The $1.8 billion tranche size reflected an upsizing from first thoughts at $1.5 billion.

Corporate and bond ratings are B–/B3 and B–/Caa1, respectively, with stable outlooks by S&P Global Ratings and Moody’s, and 3 recovery rating on the unsecured notes by S&P Global.

Tesla is a Palo Alto, Calif.-based manufacturer of electric vehicles as well as energy storage and solar products.

Leveraged Commentary & Data (LCD) is an offering of S&P Global Market Intelligence, which is owned by S&P Global Inc.