Moody's on March 27 downgraded Tesla Inc. corporate family rating to B3 from B2 and unsecured note rating to Caa1 from B3, citing production shortfalls in the company's Model 3 electric vehicle and expected liquidity pressures that will likely push the company to raise more than $2 billion.
The rating agency also lowered the electric car maker's speculative grade liquidity rating to SGL-4 from SGL-3. The outlook is negative.
Moody's said Tesla's ratings reflect the "significant" Model 3 production shortfall, citing only 2,425 Model 3s were produced during the fourth quarter of 2017. It is targeting weekly production of 2,500 by end-March and 5,000 by end-June compared with a previous target to produce 5,000 per week by end-2017 and 10,000 by end-2018.
The rating agency added that Tesla 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 said Tesla's current liquidity position will not be able to cover the convertible debt maturities, plus an estimated $500 million in minimum cash spending for operations; and a 2018 operating cash burn of about $2 billion.
"These cash needs will likely require Tesla to undertake a near-term capital raise exceeding $2 billion. Moreover, if the company maintains its expected pace of expansion, it will likely need to raise additional capital during the second half of 2019," said Moody's.
Moody's expects Tesla's rating to face further downward pressure if the company falls short of updated Model 3 production targets and fails to raise sufficient new capital, but the rating could be raised if Tesla's Model 3 production rates meet current expectations and if the company maintains good liquidity.
"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 shortfall," Moody's said. The outlook could improve if Tesla can establish credibility in reaching its current Model 3 production targets.
Tesla shares on March 27 closed down 8.22% after a string of bad news, including the Moody's downgrade and a National Transportation Safety Board probe into a deadly crash involving a Tesla vehicle in the week of March 19 in California, CNN reported.