Tesla’s Credit Rating: Why Moody’s Says Tesla is Not Investment-Grade and Some Implications
Tesla has been in the spotlight for some time now, and not just for their impressive line of electric cars. The company has been making waves in the financial world too, with their credit rating and stock prices being a hot topic for investors. Recently, Moody’s responded to an inquiry about why Tesla is not investment-grade rated by them, giving some explanations and implications of the situation.
Tesla’s credit rating is a crucial factor for the company, as it affects interest rates and credit rates that they may get on debt. Furthermore, investors’ pool for Tesla becomes limited if they do not have an investment-grade rating, meaning some funds and institutions might not invest in the company. These funds act as a suppressant for the share price, which can have a significant impact on Tesla’s future.
As Moody’s response shows, Tesla has a rating of ba1 and is just one notch below investment-grade rating, according to both Moody’s and S&P Global ratings. This means that Tesla’s credit rating is not terrible, and they provide a strong image in the financial world.
A former employee of Moody’s, Alexander Mers, has been raising awareness of Tesla’s financial position, which is out of line with their credit rating. She has been trying to push Moody’s and S&P Global to explain why Tesla’s credit rating is so low despite their strong financials and debt-to-equity ratio.
Mers has compiled data that highlights how Tesla’s financial ratios compare to other companies of similar market cap. In terms of market cap, Tesla is one of the highest market cap companies in the S&P 500. Mers’ analysis shows that Tesla has extremely strong financial ratios, including cash to debt, debt to equity, debt to EBITDA, and Altman’s Z-score. Altman’s Z-score is a formula that captures multiple measures of debt. Tesla outperforms almost every company on the list, reflecting how strong Tesla’s financials are.
One of the reasons that Tesla scores so well is that they have paid down their debt. Tesla paid off $5.1 billion of debt, excluding vehicle and energy financing, in 2020. By the end of Q1 2021, that number had been reduced to $88 million and is now even below that.
However, despite their strong financials, Tesla’s credit rating remains below investment-grade rating, which is puzzling and confusing to Mers and other investors. Moody’s response to Mers stated that their considerations for an upgrade of Tesla were not quantitative in nature, which means they were not solely considering Tesla’s impressive financial ratios.
Moody’s needed to see the company’s broadening of their product line-up before considering an upgrade of their rating to an investment-grade rating. At present, Tesla relies too much on two successful models despite their first introduction being in 2017. Moody’s believes having more concrete prospects for a broader vehicle lineup would be viewed as a positive development.
Moody’s also included the note that covered the previous upgrade of Tesla to the current level, just below investment grade, earlier in January. It highlighted that to upgrade Tesla’s rating, Moody’s looked at Tesla’s expanding global footprint and maintaining a competitive global presence, while also considering other factors.
In conclusion, the credit rating issue does not necessarily affect Tesla’s financials or their future prospects as a company. However, it may affect their stock price, as it may deter some investors from investing in the company.
Despite Tesla’s strong financials, which are comparable to other top-performing companies in the market, their narrow reliance on two successful models and lack of a broader product lineup may prevent them from acquiring an investment-grade rating. Nonetheless, Tesla continues to grow, and many are still confident in its future prospects as the company continues to make advances in the technology and EV auto industry.