Credit ratings agency Moody’s on Tuesday raised Tesla Inc’s (NASDAQ:TSLA) debt rating by two slabs, to Ba1 from Ba3, and said the Elon Musk-led company is on track to maintain its dominant position in the electric vehicle space.
What Happened: The latest upgrade comes nearly a year after the last change and lifts Tesla’s debt rating to one level below investment grade.
Stocks rated Ba1 to Ba1 by Moody’s belong to a category that is considered somewhat speculative in nature and has some exposure to risk. Those rated Baa3 onwards are considered investment grade with moderate credit risk.
The rating agency said Tesla’s swiftly expanding presence in the U.S., Europe, and China will help it deliver nearly 1.4 million vehicles this year, a jump of nearly 50% over 2021.
“Considerable investments in new production facilities in Berlin and Austin enable the steep increase in vehicle deliveries, along with an increase in production capacity in its existing plants in Fremont and Shanghai,” Moody’s said, adding that the EV maker is narrowly reliant on primarily two models.
Tesla Debt And Margin: Moody’s dubbed Tesla's financial policy to be prudent. The EV maker repaid about $5 billion of debt in the last two years. The agency expects Tesla’s debt/EBITDA to remain around 2021 levels when it had dropped below one.
Usually a net debt-to-EBITDA ratio of less than three is considered acceptable; the lower the ratio, the higher the probability of the firm successfully paying off its debt. Ratios that are higher than three or four serve as “red flags” and indicate that the company may be financially distressed in the future.
On the margin front, Moody’s expects an EBITDA margin to be 16% this year, compared with 12% in the 12 months ended September 2021.
“While the margin contribution from the sale of regulatory emission credits will likely decrease, the sale of the credits added approximately 330 basis points to margin in the 12 months ended September 2021,” it said.
The agency said it expects Tesla’s free cash flow to increase considerably in 2022, from an estimated $3.1 billion for 2021.
Why It Matters: Tesla is geared up to add significant capacity this year as it brings two big factories online — Giga Berlin and Giga Texas. The rating agency expects the EV maker to further leverage the rising global demand with more capacity.
Moody’s is among the first rating agencies this year to have upgraded the company’s debt. Fitch Ratings and S&P Global Ratings are expected to follow suit.
Tesla crushed fourth-quarter delivery records and posted its biggest volume for both the fourth quarter and the full year 2021, earlier this month.
Price Action: Tesla shares closed 1.47% lower at $930 a share on Monday.
