This could be the most critical week in Tesla's history (TSLA)

Tesla is facing a welter of negative news as it prepares to report Q1 vehicle deliveries and earnings.
The stock market is struggling to price Tesla's risk, but the bond markets are signaling a lack of confidence in the company.
Tesla is also dealing with a fatal Autopilot crash that's being investigated by the NTSB.

To say that Tesla has entered rough waters of late would be an understatement.

Ahead of reporting first-quarter vehicle deliveries and earnings, the carmaker has been dealing with a flagging stock price, and Moody's downgrade of its debt into deep junk territory, and a fatal crash in California involving the company's Autopilot semi-self-driving system.

Some proactive communications on Tesla's part about details of the crash then drew a rebuke from the National Transportation Safety Board, which is investigating the accident (the NTSB, better know for scrutinizing airplane accidents, also investigated a deadly 2016 Autopilot crash in Florida). Tesla declined to comment on the issue, which was reported by the Washington Post.

And CEO Elon Musk celebrated the April Fool's weekend by firing off a couple of tweets about Tesla's "bankruptcy" and drinking too much tequila.

Analysts are expecting two things from deliveries and earnings (earnings won't come until early May, so investors might catch a breather): production of the mass-market Model 3 coming is well below Tesla's previous projections, but possibly hitting around 2,500 per week for the very end of the quarter; and a massive loss on the financial side and the company struggles to get the Model 3 out the door.

Looking at the stock price, it's hard to tell if the bad news has already been priced in. Tesla swooned at the end of March and recovered slightly at the end of the month. On Monday, shares opened at $266, after rising over 3% on Friday.

Investors are confused

Tesla Model 3

Investors actually do seem to have digested the herky-jerky Model 3 ramp-up. Tesla said that it would be building 2,500 vehicles per week by the end of Q1 and 5,000 by the end of Q2. It hasn't neatly achieved those goals, but prior to the Moody's downgrade and the Model X crash, shares didn't look as if they were going to drop from 2017 highs, and the expectation was that Tesla would be undertaking a capital raise by mid-2018.

And at the end of March, shareholders approved an ambitious new pay package for Musk that, if everything works out, would see Tesla's market cap ascend to a staggering $650 billion. Big institutional investors approved the package, so the vote of confidence in Musk's leadership couldn't have been stronger.

What's really weighing on Tesla now isn't the slipping share price or the Autopilot crash — although the crash does bring up so serious questions about why Tesla owners are evidently letting their cars drive themselves when the vehicles technically can't — but rather the company's messy balance sheet.

The auto industry is extremely capital intensive and almost always closely linked to debt markets. This is why major automaker such as General Motors want to maintain investment-grade bond ratings. Tesla's debt is both complicated and pointedly far from investment-grade; it's high-yield debt has been trading down, hardly a long-term vote of confidence, some additional debt on the balance sheet is convertible to equity, and when Tesla merged with SolarCity in 2016, it took on the company's hefty debt load.

Can Tesla avoid bankruptcy?

Tesla Detroit sales vs market cap

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. Obviously, these factors are pulling Tesla in opposite directions: jittery optimism in the stock side, increasing pessimism on the debt side.

All eyes are focused on the car business, as well. The energy-storage and solar roof businesses aren't going to lend any support to the stock. Execution on vehicles has been notably bad, so investors will want to see indications that tesla is turning its Model 3 problems around.

If Tesla did surge to 2,000-2,500 in weekly Model 3 production for the final weeks of March, that could represent a rallying point for the stock and provide a runway for a capital raise. But the debt situation isn't going to change, regardless of what happens at Tesla's factory.

That's worrisome because debt is what kills cars companies. And it kills them fast. It's impossible to keep the parts coming in and the vehicles rolling off the assembly lines if servicing the debt becomes job one. After losing money for years, GM went bankrupt in about six months in late 2008 and early 2009.

Crisis-creation seems to be baked in to Tesla's business model, so nobody should be surprised that the company is once against making things interesting. What's different this time, when you get right down to it, is that increasingly alarming junk debt. Keep an eye on it, no matter what happens with the stock price and the pace of vehicle production.

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