New York, July 23, 2020 -- Moody's Investors Service ("Moody's") upgraded
the ratings of Tesla, Inc., including the Corporate
Family Rating to B2 from B3, and senior unsecured rating to B3 from
Caa1, and the speculative grade liquidity rating to SGL-2
from SGL-3. The outlook is stable.
The upgrade reflects Tesla's sustainable position in the auto industry
as a specialized producer of pure battery electric vehicles (BEVs).
However, preserving this strong position in BEVs in the face of
emerging competitive challenges will depend on Tesla's progress
around manufacturing efficiency and product development to achieve even
broader customer acceptance at an affordable price. Moreover,
Tesla's expansion prospects benefit from regulatory pressures on
the auto industry to reduce emissions so Tesla's advanced position
in BEVs is an important factor at the higher rating. At the same
time, the weak governance at Tesla also constrains the rating.
The following rating actions were taken:
Upgrades:
..Issuer: Tesla, Inc.
.... Corporate Family Rating, Upgraded
to B2 from B3
.... Probability of Default Rating,
Upgraded to B2-PD from B3-PD
.... Speculative Grade Liquidity Rating,
Upgraded to SGL-2 from SGL-3
....Senior Unsecured Regular Bond/Debenture,
Upgraded to B3 (LGD4) from Caa1 (LGD4)
Outlook Actions:
..Issuer: Tesla, Inc.
....Outlook, Remains Stable
RATING RATIONALE
The ratings take into account Tesla's progress and the expectation
of greater financial stability going forward, with relatively solidly
margins although high financial leverage and sizeable investment needs
will continue for some time.
After considerable start up challenges, Tesla has significantly
ramped-up sales and production of the Model 3 out of the Fremont,
California facility, and successfully launched the Model Y earlier
this year. The company also opened a production facility Shanghai,
China and plans very substantial battery and production operations in
Austin, Texas along and Berlin, Germany.
With higher production levels and better cost absorption, as well
as a broadening manufacturing footprint, Tesla's EBITA margin
should be in the mid-single-digits. This is despite
the broad economic downturn and uncertainty resulting from the coronavirus
outbreak, and compares favorably against other auto producers.
Tesla's reported EBITA margin has risen steadily from -6.9%
for fiscal 2017, to about 8.5% for the last twelve
months ending June, 2020. A significant portion of this margin
(approximately 5 percentage points) are due to the sale of $1 billion
in regulatory credits during the twelve months through June. It
will be important for Tesla, over time, to strengthen the
profitability of its core BEV operations and to become less reliant of
the sale of these credits. Finally, the company reported
$8.6 billion in cash at June 30, 2020, which
will provide much-needed liquidity as the company faces increasingly
challenging market conditions and investment demands.
Even with manufacturing challenges, Tesla has a considerable lead
in the global BEV market, with a 90% share in the US.
BEVs are a small, specialized segment of the electric vehicle market
at about 1.5% of total US auto sales in 2019, but
will gain penetration globally. Tesla does not compete in what
will be the much larger hybrid electric vehicles, nor does Moody's
anticipate that Tesla will develop products in that market. Moody's
expects that Tesla will invest heavily in order to capitalize on BEV expansion
and to maintain its leading position in the sector.
Emission regulations not only support Tesla's BEV sales, they
also afford the company with a critical revenue/earnings stream through
the sale of excess emission credit to OEMs that fail to meet emission
requirements. During 2019, Tesla's sale of emission
regulatory credits amounted to $594 million, which fall directly
to earnings as there is no direct or incremental cost associated with
Tesla's generation of these credits.
Nonetheless, Tesla will face considerable challenges, not
the least being the deteriorating global economic outlook following the
spread of the coronavirus outbreak. The automotive industry is
one of the sectors that will be most severely impacted, as we expect
global automotive sales will fall by at least 20% during 2020.
Moody's believes BEVs will be less negatively impacted by the coronavirus
pandemic and, as a result, anticipates Tesla's 2020
sales growth will be in the mid-to-high single-digits
-- considerably outperforming the industry, but significantly
lower than the company's historic pace.
Balancing this much more challenging growth environment against the company's
aggressive expansion and investment plans will be challenging.
Further competitive challenges will be posed during the next two years
as other OEMs begin to launch a broader array of BEVs.
Tesla has a sound liquidity position as it contends with these challenges.
At June 2020, the company's cash position approximated $8.6
billion. This should afford ample ability to cover the approximately
$3.2 billion of debt maturing during the coming twelve months,
and to fund a potentially sizable capital expenditure and expansion program.
This cash position, and its sufficiency relative to likely cash
requirements during the coming twelve months, support the change
in Tesla's speculative grade liquidity rating to SGL-2 from
SGL-3.
Although an automotive producer, as a maker of BEVs Tesla's
carbon transition risk is considerably lower than peers, and is
mostly limited to the carbon output in its production and from the electricity
used in the recharge of its car batteries during use. However,
important additional risks are posed by Tesla's governance structure.
There is considerable latitude to the company's CEO, Elon
Musk, with a board that has a mix of inside and outside directors.
In addition, Mr. Musk's executive responsibilities with outside
ventures such as SpaceX could tax his ability to adequately focus on Tesla's
challenges, including the need to address the poor returns and weakened
competitive position of the company's solar business.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Tesla's progress in establishing a more
profitable and competitively sustainable position in the BEV market,
balanced against the challenges of: a global economic slowdown due
to the coronavirus; increasing competition in the BEV space from
established OEMs; and the need to transition profitability away from
the heavy dependence on the sale of regulatory credits and toward the
sale of vehicles.
Tesla's rating could be upgraded if the company continues to make
operational progress through the ramp-up of its Shanghai facility
and new operation in Texas, continues a successful launch of the
Model Y, and continues steady progress towards making the Tesla
product lineup more affordable and profitable.
Metrics that would support an upgrade include: EBIT margin that
can be sustained above 5%; debt/EBITDA approximating 4x;
and EBITA/interest above 2x.
The ratings could be downgraded if, as occurred during 2018,
the company begins to encounter operational problems managing its aggressive
global manufacturing and product expansion. Metrics that would
contribute to a downgrade include: EBITA margin being sustained
below 4%; debt/EBITDA approaching 6x; and EBITA/interest
below approximating 1.5x.
Tesla, Inc., headquartered in Palo Alto, California,
is the world's leading manufacturer of battery electric vehicles,
and is also a major producer of energy generation and storage systems.
It had 2019 revenues of $24.6 billion.
The principal methodology used in these ratings was Automobile Manufacturer
Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1062773.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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support provider and in relation to each particular credit rating action
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rating assigned, and in relation to a definitive rating that may
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to rated entity, Disclosure from rated entity.
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and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
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