S&P Affirms 'B-' Corp. Rating on Tesla (TSLA); New $500M Credit Line Should Protect Against Missteps, Inefficiencies
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Standard & Poor's Ratings Services said that it has affirmed its unsolicited 'B-' corporate credit rating on Tesla Motors Inc. (Nasdaq: TSLA). The outlook remains stable.
At the same time, we affirmed our unsolicited 'B-' issue-level ratings on the company's $920 million 0.25% unsecured convertible notes due 2019, $1.38 billion 1.25% unsecured convertible notes due 2021, and $660 million unsecured convertible notes due 2018. The unsolicited '4' recovery ratings are unchanged, indicating our expectation for average recovery (30%-50%; lower end of the range) for the noteholders in the event of a payment default.
"Tesla's free operating cash flow (FOCF) will likely remain meaningfully negative in 2015, in our view," said Standard & Poor's credit analyst Nishit Madlani. "However, with the company's recent announcement of a new $500 million asset-based credit line, we believe that Tesla's liquidity cushion over the next 12 months should offer better protection against any potential execution missteps or inefficiencies (related to production and supply-chain management) associated with the upcoming launch of its Model X crossover vehicle," said Mr. Madlani. In our opinion, the company could still tap additional sources of liquidity over the next 12 months to fund its ongoing growth investments.
The stable outlook reflects our view that Tesla will continue to improve its gross margins and that the company's global vehicle deliveries will increase significantly, year-over-year, in 2015.
We could lower our rating on the company if it appears unlikely that it will be able to improve its liquidity position to fund its capital intensive operations over the next 12 months. A downgrade may also occur if significant execution issues or cost overruns related to the company's launch of its Model X later this year materialize, combined with the ongoing expansion of development on the Model S. A downgrade could also occur if the projected long-term demand for Tesla's vehicles falls meaningfully below our estimates, leading to overcapacity, or if the company's FOCF will likely remain significantly negative for the foreseeable future, causing its liquidity to weaken.
Though unlikely over the next 12 months, we could raise the rating if we see higher demand for Tesla's products, the company's operational cost reductions leads to a credible pathway for positive FOCF (a FOCF-to-debt ratio approaching 5%), its leverage falls well below 6.5x, and its liquidity position improves. We would also need to believe that the company's improved market position is sustainable.
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