Bonds Are Getting Hit

While there will probably always be true believers among stock holders, those who own and track the bonds are taking a more critical look.

The debt markets are now signaling a lack of confidence in Tesla’s ability to avoid bankruptcy down the line, while the equity markets are trying to figure out where Tesla will settle for the inevitable capital raise.

Bondholders are asking hard questions about whether Musk can deliver on his bold promise to bring electric cars to the masses before the company runs out of cash. Last Wednesday Tesla’s credit rating was downgraded and notes plunged to a low of 86 cents on the dollar, the clearest sign yet that creditors aren’t totally sure the company will be remain in good health.

The consequences are significant. Tesla’s woes have played out most visibly in the stock market, with its shares suffering a two-day, 15 percent drop that’s the biggest since 2016. But surging borrowing costs, which are now near 8 percent, could hamper the carmaker’s ability to finance itself at a critical time.

Tesla is burning through money so fast that, without additional financing, it will run out of cash before year-end. To put that into perspective, that amounts to more than $6,500 every minute of every day.

That puts the company in “crunch time” now to improve margins and generate cash flow. Tesla will report first-quarter production figures for the Model 3 this week.  The company has been promising to ramp up to 2,500 cars per week, which might have been achieved, but probably hasn’t.

Another production miss wouldn’t make it any easier for Tesla to persuade bond investors to hand over more money.  The lack of fresh capital could drive the company towards bankruptcy. And that would be no laughing matter.

 Related: Here’s Why the Stock Market’s About to Get a Big Boost.