But in the automotive world, it’s not that bad. Other major automakers have or are spending time in the same bond rating basement. General Motors’ long-term debt is also rated as junk with a BB-plus rating, a notch below Ford Motor’s rating with the same agency as BBB-minus. Ford’s rating is in the low rung of investment grade.
Receiving a junk rating is significant because it will preclude most institutional investors form buying Tesla’s debt. Admittedly, most institutions are unable to buy unrated debt as well, so there is likely no demand lost because of the B-minus rating.
Standard & Poor’s rating was unsolicited. An unsolicited rating means that Tesla did not request S&P rate their debt. S&P gives the following explanation:
“We believe there is sufficient market interest in the company’s obligations to initiate analytical coverage.”
Tesla at the end of the first quarter this year had $1.5 billion in long term debt, which in absolute terms is certainly starting to become large.
Some might point to the the fact that Tesla’s rating was unsolicited as a negative. Unsolicited credit ratings have been shown to be lower than solicited ratings. There are two main theories for this difference. First, credit rating agencies tend to be more conservative on unsolicited ratings. Second, firms that know they are more risky would prefer to keep that hidden so they self-select out of the ratings process. Therefore, unsolicited ratings are more likely to occur for lower quality firms.
It will be interesting to watch the other credit rating agencies to see how they treat Tesla’s debt and whether Tesla chooses to solicit a rating from them.