Tesla’s bonds are now classified as investment grade by Standard & Poor’s, with the agency citing the electric car maker’s recent production numbers as a reason for shifting the rating on the company’s debt out of junk territory.
The rating agency on Thursday boosted Tesla’s rating, including the credit rating and issue-level rating, to BBB from BB+. That pushed it past the threshold that separates investment grade from high-yield, or so-called junk, territory.
Companies considered investment grade are regarded as having a relatively low risk of default, which can lead to them potentially being able to borrow money at lower rates. Rival agency Moody’s has a Ba1 rating on Tesla, which still places it in junk territory on that scale.
“The stable outlook reflects our expectation that Tesla will maintain low debt levels as it sustains its solid market share, profitability, and strong liquidity amid an increasingly competitive environment for EVs,” S&P said in a statement.
Tesla has produced about 930,000 vehicles so far this year, about 50 per cent year-on-year, S&P said, despite production suspension in China in the second quarter, component shortages and inflation. That topped the agency’s expectations, leading its forecast Tesla will sell 2mn units in 2023. S&P said this will help the automaker sustain its electric vehicle market share as it faces competition from automakers in China and Europe.
The agency expects Tesla to sustain free operating cash flow to sales ratio of more than 10 per cent, despite high expenses, supply chain issues and rising commodity costs.
“With over $18.3 billion in cash and cash equivalents at June 30, 2022, and our expectation of solid cash flow at least through 2023, we believe Tesla will maintain its strong liquidity,” S&P said.
Still, S&P said Tesla needs to make electric vehicle ownership more cost-effective, and improved affordability will be an “important consideration” for their market share assumptions and for “potential improvements in its competitive advantage beyond 2024”.
