Moody's assigns B2 CFR to Tesla (TSLA), B3 to unsecured notes; outlook stable

August 7, 2017 11:36 AM EDT

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Moody's Investors Service assigned a B2 Corporate Family Rating (CFR) to Tesla, Inc. (NASDAQ: TSLA), and also assigned a B3 rating to the company's offering of senior unsecured notes. The company's Speculative Grade Liquidity is SGL-3, and the rating outlook is stable.

RATINGS RATIONALE

The B2 CFR reflects Moody's expectation that the launch, production ramp up, and market acceptance of the Model 3 will be successful enough to achieve approximately 300,000 unit sales during 2018 (a full-year sales rate averaging about 5,500 per week) with a gross margin approximating 25%. This level of sales and profitability would enable Tesla to strengthen its performance from sizable losses to an operating position that supports the B2 CFR. The B2 rating is further supported by Moody's expectation than in the event of severe financial or operating stress, Tesla's brand name, production facilities, and product lineup would have considerable value to another automotive OEM or technology firm targeting the electric vehicle and mobility markets.

The B3 rating of the unsecured notes reflects the junior position of the notes relative to the company's $1.9 billion secured credit facility.

The stable outlook reflects Moody's expectations that the shipment levels and profitability of the Model 3, combined with an adequate liquidity profile, will enable the company to materially strengthen its operating performance and credit metrics during 2018.

Bruce Clark, Senior Vice President with Moody's, said "With the Model 3 Tesla has brought together the technologies, design and manufacturing processes that have the potential to produce a profitable, high-volume electric vehicle that also has advanced autonomous driving capabilities." Clark further noted, "The major challenge facing the company during the next twelve months will largely be the considerable execution risks associated with the rapid ramp up in production of a totally new vehicle."

Tesla faces significant risks as it attempts to take production of the Model 3 from a targeted rate of 5,000 per week in early 2018 to 10,000 per week by year-end 2018. This targeted plan could put full-year production in excess of 350,000 units. This compares with a US market for full electric vehicle that was approximately 85,000 units in 2016. The company must also sustain strong customer support for the vehicle during this challenging operating period. Beyond this launch phase, Tesla will also have to contend with what will likely be an accelerated competitive response from both auto OEMs as well as technology firms that are targeting the automotive mobility market.

As a result of the rapid ramp up in Model 3 production and the significant increase in capital expenditures required under the production plan, we expect that Tesla will remain free cash flow negative into 2019. Given this negative free cash flow outlook, the uncertainties associated with the launch of the Model 3, and the potential cash requirements necessary to cover the maturities of its convertible debt, Tesla will face large cash requirements through 2018. The liquidity resources available to the company provide moderately adequate coverage of these cash requirements. This is reflected in the SGL-3 liquidity rating. Tesla's principal liquidity sources include the company's $3 billion in cash, proceeds from the proposed note offering, and $900 million available under its $1.9 billion secured revolver. Without the proceeds from the note offering, Tesla's liquidity position would be stressed.

Tesla's rating could be upgraded if the launch, production ramp up, and market acceptance of the Model 3 maintain a trajectory for unit sales exceeding 350,000 units for 2018. Credit metrics that would support an upgrade include EBITA/interest on track to exceed 1.5x and debt/EBITDA below 5.0x. Under most scenarios Tesla will remain free cash flow negative through 2018 due to its growing capital expenditure plans. However, a ratio of retained cash flow to debt above 25% would support an upgrade.

The rating could be downgraded if there are major production or quality problems for the Model 3, if consumer demand erodes to the degree that the company cannot maintain its 5,000 per week production target through 2018, or if the level of Model 3 reservations supported by $1,000 deposits fall from the current level of 455,000 to below 350,000. A ratio of EBIT/interest approximating 0.5x would also pressure the rating.



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