S&P Delivers Junk Status On Tesla

Cameron Aubernon
by Cameron Aubernon
p delivers junk status on tesla

Though still riding high all over equity markets, Tesla’s debt offerings took a severe hit in status when Standard & Poor’s bestowed a rating of junk status due to increased possibility of default by the EV automaker.

Automotive News quotes Standard and Poors

[Tesla has a] arrow product focus, concentrated production footprint, small scale relative to its larger automotive peers, limited visibility on the long-term demand for its products and limited track record in handling execution risks that could arise in managing high volume parallel production.

The automaker issued $920 million of 0.25 percent unsecured convertible senior notes due in 2019, another $1.38 billion in 1.25 percent unsecured convertible senior notes with a date in 2021, and a previous issue of such notes due in 2018 totaling $660 million. The notes are being used to fund two Gigafactory projects and further development of the Gen III EV platform meant to underpin the compact vehicle formerly known as the Model E.

In the meantime, the rating company expects the debt to remain stable over the next 12 months in part to improvements on the company’s gross margins. The rating also offers the potential for high returns for investors who know the risks and rewards the status entails.

Correction: An earlier version of this story incorrectly termed Tesla’s stock as “junk”, when it should have referred to Tesla’s debt offerings. We regret the error.

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21 of 28 comments
  • Patriotic_wish Patriotic_wish on May 28, 2014

    Is the author being trite or simply ignorant? S&P did not issue a rating on Tesla's stock (equity); it issued a rating on the credit worthiness of the company's debt. The rating -- (B-) -- is below the threshold for "investment grade" debt, hence the term junk. This does not mean that Tesla's equity is junk, nor does it portend any certainty of default. It would be extremely unusual (if not unprecedented) for any new company, relying on debt financing, to be rated investment grade. Tesla borrowed gobs of money to finance its expansion into battery manufacturing. To a credit agency, or even the investment community, this is a bet -- this is a greenfield venture with myriad uncertainties -- not a predictable investment that can be readily modeled (at least by outsiders) from a cash-on-cash return perspective. This type of risk profile is typical and appropriate of a start-up venture and does NOT inform investors as the to probability of success or failure of the business plan. Virtually any capital intensive technology company, think Apple, Compaq, Intel or even Microsoft, would have garnered a similar rating had they raised debt at a similar juncture in their corporate history.

    • See 12 previous
    • Krhodes1 Krhodes1 on May 28, 2014

      @jmo Most computer makers have very low margins, just like automakers. Apple is something of an exception. But they are not primarily a computer maker, they are primarily a software company that makes hardware dongles for their software. Apple's margins are not unusual for a software company. They also make what amounts to an attainable luxury good - it is a LOT easier to sell $600 phones than it is to sell $60K cars. And with the subsidy model so common in the US, the true cost of the phone is well hidden anyway. But even there, Apple is losing market share rapidly, and their margins are starting to take a hit. They no longer have a commanding lead in smartphones, and as the US cell phone industry turns away from the subsidized contract model, they will be hurting more and more. And even they are not immune to the reality of the industry - see their wholesale abandonment of the enterprise market because they can't make anything like the margins they make in the consumer market.

  • I bought my shares at $28. I'm trying to wait for the MODEL X to boost share prices. Do you think I should wait for the X and E or "SELL, SELL, SELL" now like the Duke Brothers???

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    • @mnm4ever If I sell now, or wait, either way I'm winning. I knew TESLA would be big after I drove the Model S back in October 2012. I also knew the Karma was gonna fail simply because I was extremely disappointed by it and early reviews called it an overpriced loser. Sad too - I saw a Karma on the road the other day. The design is a standout, the powertrain is exactly what EV people want (a hybrid that fits their routine). The pricing and interior space killed it. If only GM could use my body to help them design their vehicles. Basically, the Karma was smaller inside than the ELR.

  • Beerboy12 Beerboy12 on May 28, 2014

    Correction and apologies aside the heading and text are still incorrect. Amusingly it has brought the trolls out to play, soooo gullible.

  • Wmba Wmba on May 28, 2014

    Well, S & P should brace themselves for a complete "from the aerie" bollocking from Elon Musk. How dare these shrimp-minded credit agencies question King Musk! They need a good telling off, like everyone else who has crossed paths with this genius. "I'm right and everyone else is wrong," quoth Lord-On-High Elon. "Plus, we haven't had a decent press release for almost 3 weeks, so this is the perfect opportunity to Promulgate Basic Truths," added the battery king.