Tesla Gets Unsolicited S&P Junk Rating on ‘Niche’ Position | Hacker News Reader

Tesla Gets Unsolicited S&P Junk Rating on ‘Niche’ Position

bloomberg.com

43 pointsIBM55 comments

Lots of naysaying in these comments....

The rating makes sense to me. Tesla faces a lot of risk. There are many ways the company could end up sinking without a trace, many of them completely outside of their control.

Battery technology and rare earth mining could take a turn for the worse and make their products impractically expensive. A subtle defect could end up requiring them to recall essentially all of their product (unlike any other automaker out there, 90+% of Teslas on the road right now are the exact same model). Their one factory could burn down and they could be unable to recover from it. GM could discover that they filed a critical patent that applies to Tesla's technology during their development of the EV-1, and decide that they'd rather destroy the company than work out a licensing agreement. I could go on.

Tesla is a small company right now, and they don't have the sort of depth that a large, established company has. Yes, they have a potentially huge upside. They could potentially end up the size of Toyota or GM, eventually.

But that huge upside doesn't matter here! When rating debt, all that matters is how likely you are to pay it back. You get no points for a 10% chance of striking it rich. Even a 75% chance of striking it rich, with a 25% chance of going broke, could easily justify "junk" status, because that means a 25% chance that creditors don't get paid back.

So what's the big deal, here? Are we going to criticize S&P for telling it like it is, just because we really like Tesla?

"Compared with larger, more established automakers, the company is less likely “to successfully adapt to competitive and technological displacement risks over the medium to long term,” they said."

...hilarious

What's hilarious about it ? They are right.

The big auto companies definitely aren't as nimble in adapting to technological change but that's because they are operating on a completely different scale. Tesla would be no different if was actually selling in more than a handful of countries.

Companies like Toyota have the money, clout and scale in which to absorb any risks and change in the future. Tesla doesn't.

Can't you definitively say this about any smaller player compared to their larger counterparts in any market whatsoever?

I think there must be something more than the inherent and apparent structural reality of big fish/little fish.

I agree that they should provide context to that statement...but I also think that they should allow for the possibility of the opposite. Tesla isn't strapped down by legacy costs, processes, and contracts that larger/older manufacturers are. This, I would think, would provide them with the benefit of moving faster in a rapidly evolving marketplace.

Except that it isn't a rapidly evolving marketplace.

People don't upgrade to a new car every year so Tesla's quicker ability to adapt is somewhat meaningless.

I think the parent was commenting on the irony of this statement considering that the big US automakers were recently recipients of a large government bailout precisely because they couldn't "successfully adapt to competitive and technological displacement risks over the medium to long term".

That's not irony, that's a big reason for giving the big US automakers a better credit rating than Tesla.

If Tesla finds itself in dire financial straits, they'll be wrapped up and shut down. If GM finds itself in dire financial straits (again), they'll be bailed out (again) or merge, or something. They won't go away.

Which one is more likely to pay back your bond? The one with a virtual guarantee from the government that they'll stay in business, or the tiny startup with a bright future?

When GM was bailed out, they declared bankruptcy. That means bondholders got close to nothing.

I'm sure you're right about Tesla being left to wither, where big auto would be bailed out again, but that doesn't address this at all:

> competitive and technological displacement risks

Both GM and Chrysler went through bankruptcy in 2009.

> If Tesla finds itself in dire financial straits, they'll be wrapped up and shut down. If GM finds itself in dire financial straits (again), they'll be bailed out (again) or merge, or something. They won't go away.

> Which one is more likely to pay back your bond? The one with a virtual guarantee from the government that they'll stay in business, or the tiny startup with a bright future?

There's something I'm pretty sure you don't know. During the last bankruptcy and government bailout, GM bondholders got decimated to the tune of tens of billions (!) of dollars. If hey, there might be another bailout! is the thinking behind the credit rating, it ought not raise the rating.

For the record Ford didn't get a bailout (though at one point they asked for one)

http://www.factcheck.org/2011/09/ford-motor-co-does-u-turn-o...

>Companies like Toyota have the money, clout and scale in which to absorb any risks and change in the future.

Yep. They also have the government's backing, so if they fuck up in terrible ways and start to go under, the government will just bail them out with taxpayer money. Tesla doesn't have that sort of safety net.

On the other hand, one can argue that this is actually a competitive advantage for Tesla. They basically have no choice but to succeed. There are no well-greased politicians to come to the rescue if they fail.

I'd have to agree. If you look at Tesla's revenue and compare it to this http://en.wikipedia.org/wiki/Largest_automotive_companies_by...

You'll see that even the smallest on that list(BMW) has more than 50 times the revenue that Tesla has.

Woohoo! I was wondering whether to buy more TSLA. Now I just have to wait a couple of days and buy it on the cheap.

They've got plenty going for them in the future: New humungous battery plant, new more reasonably priced mass-market car, the most advanced electric drivetrain in the world (which they can license out), the ongoing scale out of charging points, and they still can't make the Model S fast enough to match demand.

I can't really see where S&P are coming from on this one, but I'll take free money when I see it...

You see a high chance of striking it rich and a small chance of losing your investment, and you think, this is great!

That's because you're buying stock. You'll share in the upside, if and when it comes.

This rating is abound bonds. The high chance of striking it rich doesn't do anything. And what's a small chance of losing your investment as a stock investor in a company that could become huge is a relatively big chance of losing your investment as a bond buyer who gets a fixed rate of return no matter how successful the company becomes.

I can see buying Tesla stock, but I'd be really hesitant at buying Tesla bonds.

It's convertable debt which is effectively a bond + stock option so you do share in the upside.

That's interesting! However, is it taken into account in the ratings? Even if there is a potential upside, it looks to me as far as I can tell (and I could be wrong!) that the rating is still just based on the chances of the company paying it back, and not on the risk-adjusted potential gain.

The bond rating will affect the stock by proxy, so it's alright for me. But even the bonds have a decent chance of maturing. They're convertible bonds too, not just standard interest bearing ones. So really, you can treat them more like stock anyway.

The question is "Do I see Tesla as still being here in 5 years?". No doubt about it. Well, in one form or another anyway.

Standard & Poor’s is taking great pains to defend its “A” rating for Lehman Holdings Inc.

The rating company fired off a report Wednesday asserting that the recent collapse of the investment banking firm was a case of negative market sentiment — whether or not grounded in fundamentals — creating significant difficulties that led the company to the point of failure.

“In our view, Lehman had a strong franchise across its core investment banking, trading, and investment management business,” S&P stated. “It had adequate liquidity relative to reasonably severe and foreseeable temporary stresses.”

The ratings service insisted that looking beyond the current downturn, the firm had good earnings-generating ability. “We believe the downfall of Lehman reflected escalating fears that led to a loss of confidence — ultimately becoming a real threat to Lehman’s viability in a way that fundamental credit analysis could not have anticipated with greater levels of certainty,” said S&P credit analyst Scott Sprinzen.

http://ww2.cfo.com/banking-capital-markets/2008/09/rating-it...

This is really quite amusing, considering what a stellar track record these agencies have.

Being more generous to S&P, the more time goes on the more you should notice how far removed the prices of things have become from what you might naively assume based on more classical methods.

It was more amusing that Tesla's PR implied you cannot understand their "value" using only public information.

"The rating was “developed independently by their analysts without any feedback from Tesla on our growth plans,’ Liz Jarvis-Shean, a spokeswoman for the carmaker, wrote in an e-mailed statement."

Good thing TSLA is not a publicly traded company.

TSLA is on the NASDAQ... or did I miss the sarcasm flavor?

definitely sarcasm flavored

If he knows their ticker symbol is "TSLA", he knows they're publicly traded.

That's an odd thing to say. The only impact growth plans should have on bonds is the extent to which Tesla is risking bankruptcy (by either growing to fast, or not growing fast enough).

Can any HNer give some background on solicited/unsolicited ratings? I imagine solicited ratings come about when a company knows it is going to tap into the credit market and needs something to show to investors. How often do unsolicited ratings happen? What is the impetus (and from where?) for the agency to conduct the unsolicited rating?

S&P has two revenue sources: "issuer pay" is when a company requests a credit rating for themselves, and pays for it. The other source is "subscription based" paid for by investors. They could want to "create access to a market" or "complete their coverage"*

So it's possible an investor requested a review of Tesla for their own information and S&P decided to publish the opinion publicly or S&P just wanted to. Blackmail seems unlikely.

* http://lexicon.ft.com/Term?term=unsolicited-rating

For posterity's sake I would like to state that I never contemplated blackmail as an explanation.

Pardon my ignorance, but what does "unsolicited" imply in this context? Who normally solicits a rating?

Usually the business model is the company pays the credit rating agency to get their debt rated (hence the classic conflict of interest situation). Unsolicited would suggest this was not the case.

Given the way that one hand tends to quietly grabass the other in prestigious U.S. financial organizations and large corporations, we should probably narrow the title to "unsolicited by Tesla".

It could just be S&P wanting Telsa to buy their services.

It's clear that most people commenting on this do not understand finance. If you look at Tesla's financial statements it's clear that they should have a junk rating.

While the term "junk" sounds bad, it is simply a rating of riskiness. From any objective standpoing, Tesla is a risky company. They have had negative net income over the past 3 years. You need income to have positive cashflow (excluding financings of course) and you need cashflow to pay off debt.

Do I think Tesla is going to change the world? Yes. Do I think they will survive? Probably. But from an objective, financial standpoint, they are a pretty damn risky company. Stop putting down the ratings agency for doing their job. The financial statements really do tell the whole story.

Doesn't it make sense that S&P would rank Tesla poorly? Yes, they're the first seemingly successful startup in the US auto industry in 70+ years. However, we went an entire lifetime without generating a new car company.

Their roadmap (heh) is get a car down to $40k, then another at $25k, build a couple billion dollar battery factories, sell the early majority on the idea of releasing their gasoline habits amid a "we want you dead" slaughter-fest from every car company, car dealer, and oil man in America. And then it's time to go international. Still worse, they have limited sales in a very narrow segment and have hit opposition in several states.

So while Tesla is an easy company to love, the S&P is taking a very realistic position.

The legal/legislative threat is a real one and maybe with some cash in the bank they will have the money to fight it out in the courts as the battles come.

It is the beholden politicians that could be more of a problem.

Can't wait for Musk's snarky response to this

I gave you an up vote as I suspect you'll need it.

For reference to the underlying securities (which people seem to have either questions/mis-conceptions on):

Tesla Announces $1.6 Billion Convertible Notes Offering Wednesday, February 26, 2014

http://www.teslamotors.com/about/press/releases/tesla-announ...

http://www.sec.gov/Archives/edgar/data/1318605/0001193125140...

Given that it's no secret that S&P ratings can be purchased, I have to wonder who the highest bidder on this rating was.

I'm not a tin-foil hatter, nor is this a pithy comment, but it comes so far out of left field that this question must be asked.

Rating agencies need their own ratings agencies. S&P would be listed under the "Complete Garbage" heading.

"The youngest publicly traded U.S. automaker has tapped debt markets without a ranking from any of the major ratings companies, according to data compiled by Bloomberg."

So they didn't pay for a rating, and got an unsolicited poor rating from one of them?

Go figure...

Remember how pissy the investment banks got when Google didn't use them for their IPO?

Why did this post just disappear from the homepage of HN? Before I clicked the login link it was #2 in the list... 1 min later it's not even on the first page?

Two things combined to lower its rank: a moderator tagged it as lightweight and it set off the flamewar detector.

how does one buy tesla convertible notes? i'd have to imagine this is going to increase their yield dramatically so i wouldn't mind picking some up.

Probably just sold to institutional investors.

Does S&P usually wait to be solicited by the company before giving ratings? The headline appears to imply it does.

Sounds like S&P is trying to get Tesla to buy rating services. The unsaid implication from this move is that if Tesla opens their books to S&P (of course, as part of a paid engagement), S&P can come up with a "more accurate" view of Tesla's creditworthiness.

"...limited demand for its products"? Not in Orange County, CA.

Heh, maybe they mean that the Roadster "only" sold 2,450 units, 2008-2012. That's small potatoes compared to the big automakers but the comparison is pointless.

The real news here is S&P bothered to rate the stock offering of a clear technology startup, in my opinion. From what I can tell, they don't bother with smaller companies.

This is a ranking on credit or debt, not stock.

S&P bothered to rate the stock offering

You missed something in the writeup>"Tesla,... raised about $2.3 billion in March selling convertible debt"

"limited demand for its products" - LOLDAFUQ. Tesla's cars are a highly sought-after brand, something like the iPhone of automotion.

IIRC Tesla is still having a huge backlog of orders, worth half a year or such, with new orders coming in every day...

This is pathetic. Either S&P knows something that everybody else in the world doesn't, or they've got an agenda here.

Not to be a biased Tesla fan, but the explanations given in the article don't seem to merit such a bad rating.

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