Arthur J. Villasanta – Fourth Estate Contributor
Palo Alto, CA, United States (4E) – With its debt reduced to junk bond status last week, Tesla, Inc. faces more credit downgrades as it struggles to ramp-up production of its Model 3 all-electric, four-door sedan already far behind schedule. Further downgrades might fatally jeopardize Tesla’s chances of securing the cash it needs to keep its production lines going, said analysts.
Whether this happens depends on Tesla’s first quarter production numbers, which it plans to release this week. Moody’s downgraded Tesla’s debt to junk bond on March 27 and warned of more downgrades. Standard & Poor’s also has warned of the possibility of a downgrade but will wait until it sees the production numbers.
Tesla is notorious for failing to live-up to promises made by founder Elon Musk, which some analysts say is Musk’s fault. Musk has been faulted for announcing overly optimistic production numbers and timetables, which are oftentimes divorced from reality.
Last year, Tesla originally promised it would produce 5,000 Model 3’s every week by the end of the year. The reality was it delivered only 222 sedans in the third quarter ending Dec. 31, and another 1,542 in the entire fourth quarter. Tesla has pushed the 5,000 a week target to the end of June, and it remains doubtful Tesla can make this new schedule.
Waiting impatiently in the wings for Tesla to produce the Model 3 are thousands of customers who paid the reservation price of $35,000 for Tesla’s most affordable model. But Tesla has repeatedly missed its production targets, and is burning through the shrinking pile of cash it has on hand. Worse, it faces deadlines to pay more than $1 billion in bonds due over the next year. Of thit total, $230 million is due in November and $920 million in March 2019.
Production numbers for the Model 3 are depressing. Bloomberg estimates that production stands at 1,026 per week, which is less than half the 2,500 a week target Tesla has set for the end of its third quarter, which ended on March 31.
“That would be a pretty significant miss,” said Bruce Clark, a credit analyst at Moody’s. “We’re not drawing a line in the sand by any means. But part of the issue is re-establishing credibility with constituents. At the end of the day, the company’s credibility will be significantly impacted by how close they are to that 2,500 run rate.”
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