Tesla Wins Positive Outlook From S&P as Cash Flow Takes Shape
Tesla Wins Positive Outlook From S&P as Cash Flow Takes Shape
(Bloomberg) -- Tesla Inc. won a stamp of approval from bond grader S&P Global Ratings, as Elon Musk’s electric-car maker may be a candidate for a credit upgrade.
S&P revised its outlook on Tesla to positive from negative -- bypassing the stable view in between -- on the increased likelihood that high demand and better manufacturing will help Tesla’s credit metrics, according to a report Wednesday. Tesla has been reducing debt and generating free cash flow, which should lower its leverage below four times debt to a measure of earnings, S&P said.
Tesla has had a B- rating from S&P -- six steps into speculative grade -- since the rater first assigned a grade in June 2015. It’s been subject to a negative outlook for most of the time since then, namely reflecting ongoing profitability and manufacturing challenges. That’s starting to change as the company delivered strong earnings recently, countering Musk’s naysayers and turning a profit in the third quarter.
Still, there are risks to S&P’s outlook, namely around execution and demand. S&P also said that while Tesla is cutting debt, its burden remains high at around $11.8 billion.
Tesla’s bonds have been on a bumpy ride but are rallying now as the business shows signs of sustainability. Since issued in August 2017, the 5.3% bonds due 2025 haven’t traded at par, even dipping as low as 81 cents in May. They were last quoted at around 95 cents, near the highs last seen in February 2018.
In its third-quarter earnings letter, Tesla said it expects positive free cash flow to continue as the business has gotten to the point of being “self-funding.” It ended the period with a record $5.3 billion of cash and equivalents, more than enough to pay a $566 million convertible bond that matured Nov. 1.
To contact the reporter on this story: Elizabeth Rembert in New York at erembert@bloomberg.net
To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Molly Smith, Rizal Tupaz
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