Ahead of Tesla’s highly anticipated inclusion in the S&P 500 index next week, S&P Global Ratings has bumped Tesla’s credit rating up to “BB” from a previous rating of BB-. As analyst Gary Black noted on Twitter, this is just two steps away from an “investment grade” rating of BBB. (I know, these credit rating grades don’t make much sense to me either). Black also expects Moody’s to follow up with a similar credit rating bump for Tesla.
Why the upgrade?
As you may have heard, Tesla recently capitalized on its soaring stock price by selling $5 billion of common stock around a week ago, on December 9th. Tesla had also raised $7.3 billion in previous equity rounds this year, bringing the total amount raised for 2020 to a jaw dropping $12.3 billion. At the end of the day, this means Tesla has more cash in the bank, significantly less financial risk, and much greater liquidity. All of this will keep the company running long into the future, even if tough times are ahead.
S&P also noted improving operational execution, more efficient production, and progress in Tesla’s global expansion. The credit rating agency may raise Tesla’s ratings again over the next 12 months, estimating the probability of another ratings bump at around 33%.
Equity share sales throughout 2020 have increasingly boosted liquidity and substantially curtailed the company’s financial risk. […] We expect cash on the balance sheet to exceed $19 billion at the end of 2020.S&P Global Ratings
So…. bankruptcy any day now, right?
As a result, Tesla’s net debt is essentially zero. Based on a key credit metric, debt to EBITDA, our assessment of financial risk has reduced substantially. With more cash on its balance sheet than debt, the company appears easily able to fund its global expansion in China and Europe, and broaden its U.S. manufacturing base by opening a facility in Austin, Texas. Moreover, the cushion of cash will help the company navigate through the ongoing economic impact from the resurgence of COVID-19.S&P Global Ratings
Remember when TSLAQ told us that Tesla was a cash burning fraud, with so much debt it was practically insolvent? Well, the days when anyone could plausibly make that argument are over. Welcome to the era of net zero debt at Tesla.
Nevertheless, we are risk-adjusting our assessment to incorporate significant future uncertainties, including a slower than expected rate of electric vehicle (EV) adoption and the coming fierce contest with a number of very highly capable global auto manufacturers.S&P Global Ratings
The competition is coming!!! Any year now!
We remain somewhat cautious about whether enough consumers (especially in the U.S.) will switch from internal combustion engine and hybrid vehicles to EVs given limited financial incentives and a relatively benign gas price environment.S&P Global Ratings
Yes, I’m sure the incoming democratic administration won’t increase financial incentives for electric vehicles at all. Nothing I’ve heard from them would indicate that’s a priority. And expanding incentives in California and other states probably won’t matter much either… right?