It has been a couple of weeks since Moody’s downgraded Tesla Inc’s (NASDAQ:TSLA) 5.3% 2025 senior note to Caa1 — not the worst amongst Moody’s speculative-grade ratings, but definitely high risk. It also wasn’t good news for Tesla stock because it means the company is going to have to make some serious financial decisions over the next 3-6 months to stave off defaulting on its various convertible senior notes.
The big reason for the downgrade was the company’s failure to meet the Model 3 production projections it’s made for 2018. To make matters worse, Tesla’s corporate rating could be downgraded from B3 should the production numbers continue to lag projections.
Moody’s estimates that the company will have to raise more than $2 billion over the remainder of 2018 to cover its cash burn and maturing convertible notes.
Yes, its financial situation is serious, if not deadly.
It’s All Very Scary
For anyone who can’t handle risk, Tesla stock or bonds should not be on your watchlist. I repeat. They should NOT be on your watchlist.
However, as I stated on April 4, I believe Tesla stock is in the bargain bin; aggressive investors should be buying.
While the production numbers for the first quarter might not have been red-hot, I don’t believe they signal the company’s throwing up a white flag of surrender; it’s the farthest thing from it.
The naysayers don’t see it getting to 5,000 vehicles per week. I think there’s a genuine chance they could do it by the end of the second quarter.
If it does that, Tesla stock is back in business. As I said, this isn’t your grandparents’ stock of choice.
Tesla Stock or Bond
Hetty Green was one of the wealthiest women in the history of American business. She took an inheritance of $2.2 billion in today’s dollars and turned into an estimated at $4.4 billion by the time of her death in 1916. She bought real estate and bonds, reasoning that real assets kept their value while equity could end up as worthless paper.
The last price on the Tesla 5.30% 2025 senior note as I write this is $90.85, better than where it was trading after the downgrade, but still well below par. It is currently yielding 7.3%; the senior unsecured note is probably not the best bet amongst Tesla’s debt offerings.
Instead, one might consider the Tesla 2.375% 2022 convertible note that converts at $327.50. Currently yielding 1.3% and trading around $110.19, down from its 52-week high over $126, the odds of Tesla going broke before the note matures is relatively slim in my estimation.
Of course, that’s highly dependent on what Tesla’s forced to do between now and then to keep the lights on. It’s unlikely that it will be able to make another pure bond offering so it will either have to offer up a convertible note paying much higher rates of interest or issue more stock; either way, the value of your 2.375% 2022 note goes down.
Bottom Line
Investing in money-losing stocks never is easy.
Unless you’ve got a real desire to hold bonds, I’d go with Tesla stock or wait to see what comes down the pike in the form of a debt offering later this year.
Either way, you’re looking at above-average risk and above-average reward.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
