
Tesla Gets Unsolicited S&P Junk Rating on ‘Niche’ Position - IBM
http://www.bloomberg.com/news/2014-05-27/tesla-gets-unsolicited-junk-grade-from-s-p-on-niche-position.html
======
mikeash
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?

------
bobbles
"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

~~~
threeseed
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.

~~~
victoro
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".

~~~
mikeash
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?

~~~
justin66
> 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.

------
adwf
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...

~~~
mikeash
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.

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

~~~
mikeash
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.

------
lotsofmangos
_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...](http://ww2.cfo.com/banking-capital-markets/2008/09/rating-itself-sp-
defends-lehmans-a/)

------
fidotron
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.

~~~
001sky
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.

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

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

------
dfc
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?

~~~
iambateman
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](http://lexicon.ft.com/Term?term=unsolicited-rating)

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

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

~~~
awkwit
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.

~~~
Alex_MJ
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".

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

------
rjf1990
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.

------
iambateman
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.

~~~
dwd
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.

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

~~~
jusben1369
I gave you an up vote as I suspect you'll need it.

------
001sky
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.teslamotors.com/about/press/releases/tesla-
announces-16-billion-convertible-notes-offering)

[http://www.sec.gov/Archives/edgar/data/1318605/0001193125140...](http://www.sec.gov/Archives/edgar/data/1318605/000119312514069693/d678614d424b5.htm)

------
AmVess
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.

------
vampirechicken
"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?

------
mangeletti
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?

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

------
gfodor
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.

~~~
jusben1369
Probably just sold to institutional investors.

------
jusben1369
Does S&P usually wait to be solicited by the company before giving ratings?
The headline appears to imply it does.

------
qq66
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.

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

~~~
sounds
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.

------
DiabloD3
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.

~~~
001sky
_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"

------
mschuster91
"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...

------
blhack
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.

