Tesla’s Cars Are Great, But Its Bonds Are ‘Junk’

Source: Tesla

Standard & Poor’s didn’t sugarcoat what it thought of Tesla’s (NASDAQ:TSLA) bond offerings, on Tuesday slapping a junk status (B-) rating on them due to the elevated risk that the automaker may default on the debt. However, investors can be drawn to bonds with such ratings because in the event that they do not default, the interest rates on poorly rated debt are often higher in order to afford investors access to the capital.

S&P described Tesla’s bond portfolio as being “vulnerable,” adding that the automaker has a “narrow product focus, concentrated production footprint, small scale relative to its larger automotive peers, limited visibility on the long-term demand for its products and limited track record in handling execution risks that could arise in managing high volume parallel production,” Automotive News quoted the firm as saying.

Of course, that’s nothing investors didn’t already know. Tesla’s stock, currently trading at around $211 per share, has seen a spread between $88 per share and $265 per share over the past year. S&P’s rating falls six notches below investment grade, but the firm maintains that Tesla bonds are nonetheless “stable.”

Automotive News quoted S&P as saying that its rating on the bonds “reflects our expectation that the company will sustain its recent improvement in gross margins over the next 12 months.” In the event of a default, investors likely would recover 30 to 50 percent of their investment.

Source: Tesla

Tesla has so far issued $920 million worth of 0.25 percent unsecured convertible senior notes, which are due in 2019, and $1.38 billion worth of 1.25 percent unsecured convertible senior notes due in 2021. Last year, the company raised $660 million through unsecured convertible senior notes due in 2018.

The proceeds will be used to fund the construction of Tesla’s gigafactory, which the company will tentatively be breaking ground on (in an undisclosed state) next month. The funds will also be going toward research and development of future models, and at least a portion will probably be used to jumpstart the production of the Model X SUV.

On Wednesday, Tesla’s shares didn’t take the news well, opening lower and quickly trading down over 2 percent. However, this follows a pretty decent run-up in the stock on Tuesday.

Tesla’s enormous valuation proportional to its assets and sales has drawn criticism from many, but others feel that they are betting on the company many years down the line. Those willing to plunk down money for Tesla’s stock are therefore unlikely to avoid Tesla’s bond offerings, even with a subpar rating from Standard & Poor’s.

More From Wall St. Cheat Sheet: