By on May 28, 2014


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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28 Comments on “S&P Delivers Junk Status On Tesla...”

  • avatar


  • avatar

    S&P… Why you can take thy to the bank!

    Seriously, after their fraudulent bond ratings collapsed the global economy. Why are they still in business.

  • avatar

    So they give Tesla a junk status…Tesla stock plummets today…and some guys in suits working at S&P make a killing from short-selling the stock yesterday. Can’t wait to see how my prediction pans out.

    • 0 avatar

      Well, it’s still early, but so far the stock only ‘plummeted’ to where it opened yesterday and is already rebounding.

      I guess the market actually showed some sophistication for once and knows how to read an S&P credit rating.

    • 0 avatar

      Junk bonds are an investment tool. It’s a high risk, high reward proposition for institutional investors and wealthy individuals. It’s called junk because the bonds are not “investment grade”. It’s not junk in the traditional meaning that’s it’s useless.

      Here’s a primer on Investopedia:

  • avatar

    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.

    • 0 avatar

      I’m going to go with ignorant.

    • 0 avatar

      No…this is not the same thing as Apple, Compaq or the others. This is a test of a whole new kind of product and in need of a whole new kind of distribution and sales.
      The whole story by S&P explains this. The whole story explains the product variety issues and the debt issues and distribution issues and competition issues.
      Especially the competition. They explain how many high end manufacturers are developing their own electric cars and have in place huge sales and dealership service networks…all of which could snuff out Tesla.

      • 0 avatar

        “at a similar juncture in their corporate history.”

        Did you suffer a reading comprehension failure?

      • 0 avatar

        Trailer – just because S&P says something (or for that matter, Goldman or Merrill or me) doesn’t make it correct — none of us are the burning bush…but there is a real difference between a qualified and thoughtul opinion and outright B-S. Bending metal (or in the case of Tesla aluminum) is not high tech, with this point I agree. Changing the energy storage and propulsive systems is paradigm changing. Most people don’t understand that Tesla is massive vertically integrated and has built a substantial intellectual property moat around its business — this contrasts with Fisker which purchased (outsourced) much of its technology (R&D) — it’s battery system, for example, were supplied by Quantum Technologies.

        Tesla’s powertrain has dramatically few parts count combined to an internal combustion system (ICE) with transmission. Hybrids compare even less favorably because they have both electric/battery and ICE systems. With production scale and assuming Musk is right about battery production costs, he should have a structural margin advantage.

        Going back to the early days in tech, think the 1980s, few people even understood what we would do with Personal Computers…Intel had to spend hundreds of millions on a semiconductor fab to produce microprocessors…for computers that had almost no application software. Sounds like an incredibly stupid way to piss away half a billion dollars…yet today Gordon Moore (of Moore’s Law fame) is widely acknowledged as one of the great visionary geniuses of a generation. Intel investors seem to have done OK too.

        Probably more to the point (pun intended), Steve Jobs reinvented Apple and made it the world’s most valuable company with “me too products” … MPEG players (iPods), laptops (MacBooks) and cellphones (iPhone) … sold into a highly competitive market characterized by entrenched and powerful competition. I personally think that people underestimate the economic value of a great idea that can be metastasized across a worldwide market.

        Tesla may not succeed, but those who casually and superficially dismiss the power of a disruptive idea remind me of the quote attributed to the Charles Duell (Commission of the US patent office circa 1900) when he (supposedly) quipped “that everything can be be invented has been invented.”

    • 0 avatar

      “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.”

      Tesla isn’t a tech company. It makes cars.

      Automaking is a mature, old school manufacturing business with the modest margins that being mature and old school implies. The dumb money has been bamboozled into believing that Tesla is some sort of tech business, when it doesn’t even come close. The margins will never be that high; they can’t be.

      • 0 avatar

        “Automaking is a mature, old school manufacturing business with the modest margins”

        So is the computer hardware business in which HP/Compaq and Apple compete.

        • 0 avatar

          As industries mature, margins get compressed.

          Successful tech companies tend to have high margins because their costs are skewed toward fixed costs, which allows a successful tech venture to effectively print money once they hit a certain threshold.

          Tesla doesn’t have any of that. It loses money now, it’s too small to scale, and it competes in a field in which profit margins are often mediocre at best. It’s not a tech company on the leading edge of some sector with a cost structure to match.

          • 0 avatar

            ” As industries mature, margins get compressed.”

            The cell phone industry is very mature yet Apple’s phone margins are still phenomenal.

          • 0 avatar

            Apple is essentially a luxury good. It has a brand that allows it to overcharge for its products.

            Most companies can’t be like Apple, by definition. It’s completely unreasonable to expect every business to perform like that; it is the exception, not the rule.

          • 0 avatar

            “Apple is essentially a luxury good.”

            So is Tesla.

            “Most companies can’t be like Apple, by definition.”

            Tesla can, IMHO.

          • 0 avatar

            The greatest cost of car production is the cost of the parts.

            Increasing volumes can reduce those costs to a point, but they are made of commodity goods that have to be paid for, regardless, so parts prices can only be cut so much.

            A lot of the cost of something such as an iPod or an iPhone is in the R&D. The cost of making the item itself is not that high compared to the price for which it can be sold.

            Once Apple hits a certain volume threshold, the rest of the sales that it produces are like printing money. That’s the business implication of having a cost structure that is skewed toward fixed costs.

            Tesla doesn’t make money and it doesn’t scale. No comparison. It can’t get to the printing money stage because the volumes are doomed to be too low and the parts costs are always going to be significant. Musk must be betting on battery prices falling, which will help, but that can only go so far.

        • 0 avatar

          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.

      • 0 avatar

        This. Tesla is also heavily vertically integrated. Smart move for quality, but a bad move for cost. Especially being in California.

        When the Tesla recruiter told me their supply base was around 60 companies, I couldn’t believe it. Noble, but stupid.

  • avatar

    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???

    • 0 avatar

      I have great luck with TTM. It is part of by bet on the developing world. JLR is a sideshow.
      If the press turns on Tesla or Musk is caught with a hooker, driving drunk, etc its gonna be tough. My take on Tesla is it is built on the personality/strength of one person, a little too one dimensional for me. Imagine Berkshire Hathaway price if something happened to Buffett.

    • 0 avatar

      If they can ever get the damn X out the door, it’s gonna be huge. They’ve gotten this far selling nothing but a friggin sedan during the golden age of the CUV.

    • 0 avatar

      So I am a stock market idiot, regrettably I simply never learned and never had enough money to gamble on something I knew nothing about. So I googled today’s stock price of Tesla and it says its at $206. And you bought it at $28? So you have the potential to make that much of a return?? Wow. Impressed. Of course it depends on how much stock you own but I think that’s a hell of a return no matter what. Now I understand how you own so many expensive cars. I would guess buying now is not even worth it though.

      • 0 avatar

        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.

  • avatar

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

  • avatar

    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.

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