Photo: Tesla

Moody's Investors Service upgraded the ratings of Tesla, corporate family to Ba3 from B2, senior unsecured to B1 from B3, and speculative grade liquidity rating to SGL-1 from SGL-2. The outlook changed to positive.

The upgrade of the ratings reflects the improving outlook for the profitability of Tesla's core automotive operations (excluding the sale of regulatory credits), the expanding global market for battery electric vehicles (BEV), and the company's healthy liquidity position.

Moody's based the new rating on several key points. The growing scale of Tesla's BEV operations will support gradual improvement in the company's automotive profitability and margins, excluding the contribution from its sale of regulatory credits. The company has been successful in increasing global Model 3 production and increasing production capacity. Tesla's large cash position of $19 billion will support its ability to fund the planned expansion of its production facilities in Europe and the United States as the market grows.

The positive outlook reflects Tesla's leading position in the BEV sector, the favorable long term growth prospects for electric vehicles, and a liquidity position that should comfortably fund near-term expansion plans. The outlook also recognizes the potentially supportive policies under the Biden administration for electric vehicles.

Tesla's $19 billion of cash affords it a strong liquidity position with ample capacity to:

1. repay approximately $1.8 billion of debt maturing over the next twelve months;
2. fund a $4.5 to $6 billion capital expenditure program; and,
3. cover negative free cash flow that could be as much as $1 billion.

Tesla's ratings could be upgraded if the company remains on a trajectory to sustain automotive EBITA margins above 4% during 2021 as it brings European production facilities on line. Maintaining a strong liquidity profile to fund its capacity expansion and production ramp up will also be critical to an upgrade.

Because of its all-electric product line, Tesla faces no risk from having to meet carbon emission requirements that exist in all major automotive markets. This affords it a significant advantage relative to all of its main automotive competitors.

H/T @SawyerMerritt/Twitter

© 2021, Eva Fox. All rights reserved.

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This article is for informational purposes only. You should not construe any such information or other material as an investment, financial, or other advice. Nothing contained in this article constitutes a solicitation, recommendation, endorsement, or offer by Eva Fox, Tesmanian, or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.

Eva Fox holds zero shares of Tesla, Inc., and currently (at the time of this article's publishing) holds zero options or securities in Tesla Inc. and/or its affiliates.