What The Bond Market Is Telling Tesla Shareholders

under tremendous pressure the past week and after falling the past three weeks. For the week the shares were down $35 or 12% to $266 and since its most recent high on February 26 they are down $91 or over 25%.

Equity investors should pay attention to changes in a company’s debt , as it can foreshadow future issues for the company and its stock. While I believe Tesla is far away from debt repayments potentially being a problem, as most investors know secured debt holders are paid back before equity investors.

Tesla Motors unveils the new lower-priced Model 3 sedan. AP Photo/Justin Pritchard

August 2017 debt trading at a 12% discount

Tesla’s August 2017 5.3% debt that is due in August 2025 is trading at a 12% discount, or 88 cents to the dollar, a new all-time low per FINRA. This means debt that was sold for $1,000 is now worth $880 and its implied interest rate is approximately 7.5%. The bonds had been trading in the low $900’s before Moody's downgraded the company’s credit rating on Tuesday, so they were at a discount already.

It could be that the debt market is warning about potential problems or it could be they are overly concerned and the debt is offering a great buying opportunity. We should have incremental information early next week when Tesla’s provides preliminary March quarter production and delivery results.

Tesla's $1.8 billion 5.3% bond price

Moody’s downgraded Tesla’s credit rating

Bruce Clark at Moody’s Investor Service believes that “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.”

He added, “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.”

On Tuesday Clark downgraded Tesla’s credit rating from B2 to B3, which is the lowest rating of Moody’s B category. By taking Tesla’s rating to B3, this means Tesla’s debt is considered “speculative and subject to high credit risk.”

He also downgraded its rating for the company’s unsecured debt from B3 to Caa1. By moving Tesla’s unsecured debt to Caa1 it moves to a lower category. It means Tesla’s unsecured debt is “speculative of poor standing and are subject to very high credit risk.”

Lastly, he changed the outlook for the company from Stable to Negative. Overall these changes may force some bondholders to sell based upon their internal rules.

Tesla has over $9 billion in debt with maturities ranging from 2018 to 2049 (for Solar asset-back loans). The original interest rates are as low as 0.25% (convertible debt) to as high as 7.7% (Solar asset-backed loans). To get a read on the debt market’s outlook for the company, looking at the $1.8 billion that was raised in August last year gives an indication that creditors and the rating agencies have become incrementally.

A recall for 123,000 Model S’ sent Tesla’s shares down $6.63, or 2.5%, in Thursday’s after-market trading to $259.50, which almost erased the $8.35 gain during the day. This is after they were under tremendous pressure the past week and after falling the past three weeks. For the week the shares were down $35 or 12% to $266 and since its most recent high on February 26 they are down $91 or over 25%.

Tesla Motors unveils the new lower-priced Model 3 sedan. AP Photo/Justin Pritchard

August 2017 debt trading at a 12% discount

Tesla's $1.8 billion 5.3% bond price

Moody’s downgraded Tesla’s credit rating

He also downgraded its rating for the company’s unsecured debt from B3 to Caa1. By moving Tesla’s unsecured debt to Caa1 it moves to a lower category. It means Tesla’s unsecured debt is “speculative of poor standing and are subject to very high credit risk.”

Lastly, he changed the outlook for the company from Stable to Negative. Overall these changes may force some bondholders to sell based upon their internal rules.

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