Tesla, Inc. Credit Research
Rapid improvement in financial performance makes Tesla an attractive
vehicle for bond investors
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Rapid improvement in financial performance makes Tesla an attractive vehicle for bond investors
• The company made large investments during 2016–2017, mostly associated with ramping up production of Model 3.
• Now Tesla produces around 5,000 Model 3’s a week, which enables Tesla to compete in US unit sales with such automotive giants as BMW, Daimler, and Lexus.
• In Q3 2018, Tesla generated significant positive free cash flow, and is expected to continue doing so in the quarters to come.
• Due to the cash generation, Tesla will not only be able to service its debt in 2019, but will strengthen its financial position. We expect Tesla’s net debt/EBITDA ratio at 3x at the end of 2019.
• The company’s August 2025 bond has a modified duration of 5.3 years and currently trades at a yield of 7.8%.
• The net debt/EBITDA ratio of 3x will put the company in the B+/BB- rating bracket—compared to Tesla's current credit rating of B-.
• These considerations imply that Tesla's 2025 bond will significantly outperform the market in 2019; the spread compression potential is at least 150 bp.