Photo: Justin Westbrook

For years, Tesla has been riding high on a combination of venture capital and good old fashioned borrowing, all while losing billions of dollars. But this week, as its stock nosedives and its credit gets downgraded, Tesla might finally be forced to ask itself: What if this, in fact, is entirely unsustainable?

The bad news: Tesla’s stock has dropped 15 percent in the past two days, its biggest two-day drop since 2016. Its now trading at $248 or so, down from $305 just 48 hours ago.

People do still want to buy Tesla cars, and the backlog for a Model 3 remains as big as ever, but at the same time demand doesn’t appear to be quite as huge as CEO Elon Musk initially promised. The Wall Street Journal reports that analysts insist fewer than 30 percent of the customers invited to take delivery of the Model 3 have taken the company up on that offer. It is entirely possible prospective owners are taking a “wait and see” approach while the car’s well-documented quality and production issues get sorted.

More bad news: Two days ago, Moody’s, the credit ratings service, downgraded Tesla to a rating of Caa1, which is extremely bad and will make it very expensive for Tesla to borrow money. All of which might not be a problem if creditors still believed in Tesla’s basic mission and Elon Musk. But yesterday afternoon, Bloomberg reported that that might not be the case anymore.

Wooed by Musk’s personal appeals, bond investors pretty much ignored the carmaker’s prolific cash burn and repeated failures to meet production targets and lent it $1.8 billion at record-low interest rates.

But now, after a spate of fresh setbacks in the past week, including a fatal Tesla crash and a credit-rating downgrade, 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. On Wednesday, Tesla’s notes plunged to a low of 86 cents on the dollar, the clearest sign yet creditors aren’t totally sure the company will be money good.

Advertisement

That’s bad! But Tesla still has at least one card left to play, though, as the Financial Times points out:

One of Tesla’s most prized assets is its Gigafactory, a giant battery plant in Nevada. But an unusual term in the bonds mean that this facility is not subject to the same restrictions as the rest of Tesla’s property.

Covenant Review, a research firm that analyses bonds documents, explains that this means the Gigafactory “can be freely pledged to secure debt”.

In other words, if Tesla truly gets into trouble, bondholders may find the company mortgaging its battery factory to raise debt that ranks ahead of them.

Advertisement

Tesla can also reassure itself that a lot of people still want to buy their cars, even as there seem to be no end to its production hell. Add it all up, and right now the future of Tesla might be darker than we all thought.

A Tesla spokesperson did not immediately get back to me for comment on this story, but I will update it if they do.