Analysts at Moody's Investors Services warned that Tesla's launch of its first mass-market model 3 for electric car manufacturers would pose a "considerable" credit risk.
In a study, New York-based credit agencies assigned Tesla a family rating for B2 companies, which they placed in a highly speculative camp. Moody's made a phone call after deciding whether Model 3 (the company's battery-powered car) could make or destroy Tesla.
Earlier this week, Tesla announced plans to sell $1.5 billion in senior bonds to help finance its Type 3 production commitments. According to MarketWatch, the bond offers a 5.25% coupon.
According to the data of rating agencies, entrepreneurship rating is Moody's evaluation of the ability of business families to fulfill all their financial obligations. When ratings are assigned to companies and non-financial debtors, corporate family ratings are usually used for speculative ratings issuers.
Credit rating firms argue that capital-intensive production in Mode 3 will expose Tesla to "substantial cash demand by 2018", especially if sales data fail to meet the company's high expectations. These concerns are exacerbated by fears that the demand for electric vehicles in the United States may be insufficient to meet Tesla's active production commitments.
Bruce Clark, senior vice president of Moody's, said: "The main challenge facing the company in the next 12 months will be the huge execution risks associated with the rapid production of a brand new car." Tesla faces a huge risk as it tries to increase production of the Model 3 from its target speed of 5,000 vehicles per week at the beginning of 2018 to 10,000 by the end of 2018. This targeted plan could produce more than 350,000 units a year. By contrast, the all-electric vehicle market in the United States was about 85,000 in 2016.
Moody's estimates that Tesla will sell 300,000 Model 3 cars in 2018. Although this figure is below the company's target of 500,000 yuan, Moody's added that its forecast still represents a successful verification of Tesla's expertise in automotive manufacturing.
Tesla is providing its Model 3 on demand to help finance future projects, including the launch of new passenger and commercial vehicles and solar products. (See also: Tesla plans to test automatic semi-trucks.)
Moody's also warned that Tesla could face increasing competition from companies such as General Motors (GM), which launched Chevrolet Bolt earlier this year, and new entrants such as Apple and Google of Alphabet Inc. Credit rating agencies added that Tesla had little proprietary technology to support sustainable competitive advantage over its peers.
Moody's analysts wrote in their research report: "Such an astonishing and rapid growth in output is an important factor in Tesla's potential competitive growth as it continues to lead other more mature auto manufacturers and technology companies, such as Apple and Google."
In recent years, investors'interest in taking on high-risk bonds has increased dramatically as low interest rates have dragged down the yield of traditional bonds. However, some analysts questioned whether Tesla's bonds had good monetary value, especially considering the amount of risk it posed. (See also Tesla's $1.5 billion bond issuance accelerated.)
Valerie Potenza, head of high-yield research at Xtract Research, Debtwire's sister company, told MarketWatch: "Anyone who focuses on a large number of high-yield bonds expects stronger protection against future debt." We think it's a terrible connection, but people seem to turn a blind eye to Tesla's story."
CreditSights analysts came to a similar conclusion: "We expect the deal to be sold in a hot market and perform well, but we believe that 5.25% is insufficient compensation for business risks and weak asset protection," they said in a report also reported by MarketWatch.