Tesla Bonds Get Junk Rating From S&P

Tesla Bonds Get Junk Rating From S&P

Standard & Poor’s issued Tesla a “B-” corporate credit rating yesterday.

S&P assigned the company an unsolicited B- corporate credit rating and also assigned an unsolicited B- rating to the notes Tesla issued earlier this year with a stable rating outlook. The Palo Alto, Calif.-based electric car maker announced $2 billion in unsecured convertible notes in late February that it plans to invest in its forthcoming battery production facility.

Companies are assigned a junk rating when they fall below an investment grade credit rating. BBB is considered to be the lowest investment grade rating. That means Tesla will have to pay higher interest rates on money it borrows, but it could also be also significant to the company because it limits the pool of potential investors. For example, many pension funds are prohibited in their bylaws from investing in bonds rated below investment grade.

“We expect global competition for alternative fuel vehicles to intensify over the next few years as competitors penetrate this market through improved products,” the S&P report said. “We believe there is considerable uncertainty in Tesla’s long-term prospects and believe that the company is less likely (compared to larger, more established automakers) to successfully adapt to competitive and technological displacement risks over the medium to long term.”

Despite that, S&P says it expects demand for the Model S to help sustain its recent improvements in gross margins. Tesla continued to lose money through the second quarter, but still outperformed analyst expectations.

S&P said its assessment of Tesla has to do with its narrow product portfolio, concentrated production and small footprint relative to other much larger auto makers. It’s limited history also contributes to uncertainty about the company’s future performance.

So far, Tesla has been forced to push back the planned release of its Model X crossover, which is based on the same platform as the Model S sedan. But one of the biggest question marks in the company’s immediate future lies with getting its “Gigafactory” online. Once the facility is operational, Tesla will no longer be hampered by relying on outside suppliers for the batteries that will be essential for its Gen II affordable electric car.

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