Tesla Bonds Get “Junk” Status

MAY 28 2014 BY ERIC LOVEDAY 47

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Tesla Bonds Get a “B-“

Tesla Bonds Get "Junk" Status Rating

Tesla Bonds Get “Junk” Status Rating

On Tuesday, Standard & Poor’s assigned Tesla Motors’ bond with a B- rating.  Or, in Wall Street talk, Tesla Motors’ bond got “junk” status.

“Junk” status is assigned when there’s an increased possibility of default.   A “junk” bond bond is rated below investment grade. These bonds typically have a higher risk of default, but pay higher yields due to their risky nature.  This makes them attractive to investors who are willing to take the risk in hopes of a BIG return.

As Automotive News reports:

“In describing the portfolio as “vulnerable,” S&P stated that Tesla has a “narrow 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.”

Despite the “junk” rating S&P believes that Tesla bonds are “stable” at the moment.  This “stable” rating “reflects our expectation that the company will sustain its recent improvement in gross margins over the next 12 months,” according to S&P.

Per Automotive News:

“So far this year, Tesla has issued $920 million of 0.25 percent unsecured convertible senior notes due in 2019 and $1.38 billion of 1.25 percent unsecured convertible senior notes due in 2021. Last year, the company issued $660 million in unsecured convertible senior notes due in 2018.”

Those funds will mainly be put to use in constructing the battery giga factory and for development of Tesla’s Gen 3 electric vehicles

Source: Automotive News

Categories: Tesla

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47 Comments on "Tesla Bonds Get “Junk” Status"

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ModernMarvelFan

So does the US government bonds… =)

That doeesn’t stop people from buying it.

GeorgeS

You mean them?

TomArt

“those”

Nick

US sovereign debt has very high ratings, but doesn’t pay returns which make it worth holding.

Mint

Low returns are a common feature of all high rated bonds.

It’s a product of the modern economy. There’s so much more money sitting around than reliable borrowers (or investment alternatives) that the wealthy will take whatever piddly returns they can get.

ggpa

How does that compare with other auto industry bonds …. for instance … I recall GM & Chrysler being bailed out

Rob Stark

GM and Fiat Chrysler has junk status.

Ford recently upgraded to lowest investment grade.

GeorgeS

Thx
Some one that knows something instead of flapping gums with a cute “stage name”

I think we should make it where you have to be a real person with a real name to make a comment.

Taser54

Taser is a real, trademarked name.

GeorgeS

I don’t care.
It’s still a little stage name to hide behind.

The WSJ finally layed down a policy like I’m talking about.

You have to be registered with your email address and you have to have a verifiable identity to comment. It cuts down on comments that are unproductive.

GeorgeS,
I think this is better. One can comment freely without fear of being tracked. I guess not completely, but gives a secure feeling 🙂

Taser54

Well, I guess you are off to WSJ, George S????
Or perhaps you should start your own forum?

The mods here do a fine job of furthering discussion, warning posters when they are out of bounds, and culling the herd, when necessary.

TomArt

I’ve been following this site for quite a while now, and I have seen practically no spam of any kind – amazing, since I have seen lots of spam on sites that actually require signing up with something, such as through Facebook or Twitter, etc.

Oh its here Tom, we just try to pounce on it as quick as we can.

The filter gets most of it, but other than from about 2:30am EST to 5:30 AM EST there is always someone online who moderates and grabs what has been missed + attempts to weed out the waaaay over the top abuses (foul language, personal attacks, etc.)

We hold the last 30 days worth of spam in moderation until it is discarded…currently there is 13,597 pieces. I kid you not.

TomArt

Good work!

Thanks!

Rob Stark

A common first name plus an initial is not a real name.

You are free not to read my comments and hang out at the WSJ website.

Fact is S&P has GM and FCA bonds rated below investment grade and Ford just barely investment grade.

Nix

It depends upon which rating agency you ask.

Ford (F) is rated BBB- by S&P and Baa3 by Moody’s.

GM (GM) is rated BB+ by S&P and Baa3 by Moody’s.

Toyota (TM) is rated AA- by S&P and Aa3 by Moody’s.

For context, both Amazon and Google were rated as junk bonds as start-ups too. I don’t see any problem with this rating, based upon the reasons they stated. Basically they are just saying this company is a relatively new start-up, and like other new start-ups, there is risk involved with investing in it for a payout that won’t come until half a decade away.

GeorgeS

I’m 65 and retired.
I started saving for retirement before Anon and “Modern Marvel fan” were born.

but I have never once had the urge to buy convertibles……it’s a hard product to get my head around.

ModernMarvelFan

I certainly hope you did before I was born. If you didn’t, you wouldn’t have “saved” enough money to buy your Volt and your Tesla…

GeorgeS

I don’t have a Tesla.

What do you have “ModernMarvelFan”

Do you actually own an EV or are you just here to make cute comments.

MTN Ranger

GeorgeS, you seem a little cranky today.

GeorgeS

I’m always cranky when I have to listen to stupid comments.

ModernMarvelFan

I have a Volt. I guess you don’t read much comments here to know or you are too old to remember…

I bought my Volt where you leased yours, right?

TomArt

We found Angry Grandpa!

(actually, those videos are wrong for too many reasons to enumerate here)

Nix

It is what you do when you like to gamble, but hate to go to casino’s. Fun for folks who have enough money to put some at risk, but not such a good idea for folks who need their money to fund their retirement.

Anon

Not feeling the love from you tonight, George. But if it in any way helps you sleep better tonight, I wanted to let you know you were only 15 when I was born… 🙂

Open-Mind

Ditto.

GeorgeS

Thx Anon.
I feel better now.

Anon

It will be a difficult year for Tesla, as they’ll have to spend huge in several areas at once. Those who can’t think in terms of long timescales, will probably freak out. 🙁

Indeed, it will be a real pain. According to Tesla sales model, they need to have retail shop anywhere they sell their cars. That means, opening up charging stations and shops in many villages in China, only to sell couple of cars every year. Haven’t seen such desperation in years.

TomArt

LOL – I see through your sarcasm.

y vachon

Those rating agency gave the best note for
subprime bonds.Why does nobody remember that?

Alonso Perez

This is really kind of simple. Tesla, as usual, did the unusual. It issued over two billion in convertible paper without paying a single dime to any of the ratings agencies.

Put another way, Tesla is treating the agencies the way it does dealers: We have no need for you. We have no need for your phony stamp of approval.

And, just like the dealers, S&P understands what this means. It is a direct attack on their business model, which is to charge issuers for rating their paper.

This “free” (unpaid, unsolicited) rating was made for exactly one reason, to tell every company out there that S&P will trash talk your paper if you dare to issue it without paying S&P for it’s expert opinion.

Put another way: “Nice bond issue you have there. Be a shame if anybody gave it a six level below junk rating.”

That’s not quite as simple. Tesla paid hundreds of millions to its favorite ‘friendly’ bankers, namely goldman sachs, morgan stanley and couple others. Their analysts then drummed up their junk bonds and stocks to public, defrauding many mom and pop’s retirement funds.

S&P has learnt its lessons during housing bust. They would have rated Tesla ‘junk’ had it been asked to rate tesla bonds.

I rate Tesla as ‘fraud’.

Alonso Perez
You seem to be confused about the what S&P does and what Goldman does. Tesla paid Goldman to underwrite their bond issue. Goldman is an investment bank. Their job is to raise investment money. That is a job with actual value for a company, the money raised. You can issue paper without paying a ratings agency, but you cannot issue paper without an underwriter. Tesla used Goldman, Morgan Stanley, and Deutsche Bank. Your contention that Tesla paid “hundreds of millions” to Goldman Sacks is flat false. The total discount given to all the underwriters for both series of notes (due 2019 and 2021) is a little over $35 million if they fully exercise their options, plus another million or so in fees. Worst case, about $37 million. This is about 1.5% of the value of the issue, a fairly standard amount. S&P is a ratings agency. They raise no money. They simply give an opinion in exchange for money. S&P learned nothing from the housing bust because ignorance was not their problem. Their problem is that their business model involves receiving money from the very entities they have to evaluate. It’s a conflict of interest that has not changed. Nobody… Read more »
MDEV

+1

Dan Hue

Question is, is the rating fair? Does not seem out of line to me. No matter Tesla’s greatness as a company and its products, it must be a risky investment.

Alonso Perez
No, actually I don’t think it’s a fair rating if you compare with other S&P ratings. I agree that there is significant risk for Tesla but many of the justifications given by S&P are quite ludicrous. You can claim that Tesla has less scale, but not credibly that it is at risk of a technology disadvantage. Tesla is a technology leader by any reasonable definition, and by virtue of its location and cultural identity in Silicon Valley it has better access to technology than most automakers. That’s without mentioning its relationship with SpaceX or Musk’s personal relationship with Google’s Sergey Brin, among others. Tesla paper is obviously not comparable to sovereign paper from major countries, say the US or Germany, or with long lived stable companies like GE or AT&T. But consider that S&P rates Fiat higher, at BB-, than Tesla. This is insane. Fiat has virtually no technology pipeline and by its own admission loses $14K on every Fiat 500e it makes. It has a poor product road map and its European presence is concentrated in the weakest markets, in southern Europe, and virtually absent from the strongest ones, like Germany. I can only conclude that S&P is punishing… Read more »
TomArt
The problem with ratings agencies is that they are for-profit businesses. If you want impartial ratings with oversight and accountability, then these rating agencies need to be abolished and a single Federal rating agency needs to be formed (maybe a branch of the FDIC, or better yet, the SEC). For funding purposes, everyone would pay the Agency a fee, like banks pay the FDIC a fee, but there is no conflict of interest. The company in question would pay the fee, accompanying the ratings request for each security they wish to sell, because they have to. In return, the Agency publishes a rating for that security. This would also provide a standard. Just like the EPA efficiency ratings, it would provide a standard by which to compare the relativel investment risks of securities. I envision that it would be much like the Patent & Trademark Office, just much smaller. A company wishes to sell stock, or issue bonds, or some other security. A request for a rating of that security would be filed with the hypothetical Agency along with the rating fee. The request would be forwarded to the appropriate analyst group for establishing an investment rating on a standardized… Read more »
Mint

You’re obviously clueless as to what ‘fraud’ even means.

Stop embarrassing yourself, and learn a few basics about markets.

TomArt

I see through the post that we have a troll on our hands.

ffbj
Learned it’s lesson? The agency that rated CDO’s as triple A? An agency paid by the very companies it is paid to rate? Can you say conflict of interest? From the article: “narrow product focus, concentrated production footprint, small scale relative to its larger automotive peers,” My comment: These are precisely some of the reasons Tesla will be, and has been a success. The quote ontinues; “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.” My comments: In essence true regarding high volume, as this element is unknown and Tesla’s ability to handle that will certainly be tested, but say that will fail is simply speculation but still an unknown. They have shown resilience in overcoming difficulties. No mention of them building a sc network across the U.S. and eventually the world, building an award winning ev from scratch, while the so called veteran companies sat on their duffs poo pooing Tesla’s efforts. Somehow not convincing that their debt should have downgraded with the flimsy evidence they present as reasons for such a downgrade. But then again they are a rather flimsy agency… Read more »
jkw

If you look at their financial statements, it would be hard to rate their bonds any higher than this. Their cash flow is very low. They can’t afford to fund their expansion plans from revenue, so they are funding them entirely from new debt and new stock offerings (they had to issue new stock to make the news about paying off their government loan early). If their ambitious expansion plans don’t work, then they are guaranteed to be in bankruptcy within a few years. Since they are essentially trying to create a new market, there is no way to evaluate how likely they are to succeed. Tesla is a high risk investment, and it would be irresponsible for an investment adviser to tell you anything other than that.

I think Tesla is likely to succeed, but that doesn’t mean their stocks or bonds are good investments at current prices. Tesla is only fairly priced if you assume that they will meet all of their sales forecasts, which won’t be possible if they have any delays.

Alonso Perez

Every company that issues bonds or stocks does so because they cannot invest from income alone at the speed they consider to be optimum for the market they want to develop.

If a company had no need for capital, there would be no bond to rate. So that is not a reason for such a low rating.

Tesla is risky but not riskier than say Fiat, which as I mention elsewhere has very little technology, has less scale than other major automakers, loses money in Europe, and has essentially no intention to get into either EVs or fuel cells. The company is supported by profits from Chrysler! Think about that. According to S&P, Fiat deserves a higher rating than Tesla, by three grades no less.

MDEV

I will sell my stock today Standard & Poor’s is accurate with predictions like in 2008 when they gave a AAA+ to buy credit swap bonds that put us in the great recession.

ffbj
I think jkw makes some good points in the sense that it is a risky investment In fact all investments involve risk. Now if you had of bought their stock at say $30 a share and sold half of it back at $60 dollars you would have made you initial investment money back, then your risk would be zero. I think BBB+ would be fair, snce we talking big money, but after all Tesla paid off its government loan early and has a history, though a short one, of meeting its financial obligations, and plenty of heavy weight backers. @George S. Convertible bonds are for institutional investors. Also the term junk is misleading in that anything less than investment grade is designated junk. A misnomer. Also from the article: pure conjecture and invalid conclusions based on saying that established car companies are somehow better than Tesla in a business where they have proved just the opposite. “Established” car companies, such as GM went bankrupt and bond and stockholders lost most of their investment. S&P analysts Nishit Madlani, Dan Picciotto and Joseph Lin wrote in the report. Compared with larger, more established automakers, the company is less likely “to successfully adapt… Read more »
TomArt
One thing I’ve noticed is that financial people have narrow views and limited comprehension beyond numbers they can point to. This is also true of the medical profession (especially medical insurance) and many other professions, but it’s particularly true of finance. Also, finance has no comprehension of technology, no matter how many experts they may hire to evaluate technology. They have always been clueless about solar PV and have been utter morons when it comes to hybrids and plug-ins. To be reasonable, however, S&P is certainly accurate insofar as there is significant execution risk for TMC going foward. Also, since TMC is EV-only, then adaptability, in a general sense, is a concern. Given the industry shift to plug-ins, particularly BEVs, it looks like adaptability is a problem for the legacy automakers while TMC has a massive lead advantage. Also, the Roadster was profitable; the powertrain business has been, and still is, profitable; and the Model S is profitable. Given the popularity of the Model S and of SUVs, then the Model X + Model S will also be profitable. The Model S has had glitches which have been fixed, some proactively, others in direct response to customer complaints. It’s the… Read more »