Tesla scores blue chip status after Moody's debt upgrade
In a huge milestone for Tesla (TSLA), the EV-maker is now a blue chip.
Moody’s Investor Research upgraded the EV-maker's credit rating to Baa3, which is the first rung on its investment grade ladder for corporate debt, with Tesla's credit outlook changed to stable. Previously Moody’s classified Tesla as Ba1, which is the agency’s top rating for high yield corporate, or junk, debt.
In its report, Moody’s wrote the ratings upgrade “reflects Moody's expectation that Tesla will remain one of the foremost manufacturers of battery electric vehicles with an expanding global presence and very high profitability.”
Moody’s expects Tesla to deliver around 1.8 million vehicles globally in 2023, which would be a 34% increase compared to 2022, and cites its “considerable investments” in new vehicle and battery production as enabling a “steep increase” in global deliveries. Moody’s noted that the expansion of the product lineup with the Cybertruck this year is a positive step.
Moody’s also said that Tesla’s heightened focus on efficiencies in its manufacturing process—and financial prudence—were factors the upgrade.
Moody’s expects Tesla to maintain an industry leading EBITA margin in the mid-high teens compared to its peers. Other positives: The rating agency also expects the company to reduce costs by 50% for its next-gen vehicle boosting profitability, which would counteract price drops for its Model 3 and Model Y high volume vehicles.
Moody’s upgrade of Tesla to investment grade follows a similar move by S&P Global Ratings back in October of last year. In upgrading Tesla to “BBB,” considered an investment grade rating, S&P analysts wrote at the time, “We believe Tesla continues to demonstrate market leadership in electric vehicles (EVs), with solid manufacturing efficiency that supports strong EBITDA margins and sustained positive free operating cash flow (FOCF), albeit with high capital expenditures.”
With two ratings agencies giving Tesla investment grade debt ratings, Tesla is now considered a blue chip company from a corporate debt perspective. Typically this means conservative investors like pension funds and other institutional investors will consider Tesla debt an attractive investment, and makes the borrowing pool for Tesla deeper, and cheaper. There are also ETFs and other passive and actively managed funds that only invest in blue-chip corporate debt.
A interesting question: Why did it take Moody’s so long to upgrade Tesla to investment grade? Not clear. Tesla is right now a top-10 public company in the U.S. by market cap. It has also has been profitable for many quarters now consecutively, has very little debt ($1.597 billion as of the end of Q4), a large cash horde of $22.2 billion at the end of last quarter, and industry best operating margins.
Yahoo Finance reached out to Moody’s for further clarification, but a spokesperson was not immediately available for comment.
Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on Instagram.
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