Moody's has upgraded the corporate rating of Tesla (NASDAQ: TSLA) to Ba1 from Ba3. The outlook remains positive. The liquidity rating of the speculative level SGL-1 has not changed.
The upgrade and positive outlook reflect Moody's expectation that Tesla will maintain its position as the leading battery-electric vehicle manufacturer, continue to rapidly scale up production, and noticeably improve profitability, the firm wrote in a note.
The Ba1 corporate family rating (here) reflects Moody's view that Tesla will maintain its position as the leading manufacturer of battery electric vehicles with a swiftly expanding presence in the U.S., Europe, and China. Moody's anticipates that Tesla will deliver nearly 1.4 million vehicles in 2022, up from approximately 936,000 in 2021. Considerable investments in new production facilities in Berlin and Austin enable the steep increase in vehicle deliveries, along with an increase in production capacity in its existing plants in Fremont and Shanghai.
Tesla's growing scale, regional production facilities, and efficient manufacturing processes support Moody's expectation of an increase in EBITA margin to 16% in 2022, up from 12% in the last 12 months ended September 2021. While the margin contribution from the sale of regulatory emission credits will likely decrease, the sale of the credits added approximately 330 basis points to margin in the 12 months ending September 2021. Moody expects that a more competitive offering of battery electric vehicles by other automakers could start to exert some pressure on margins in 2023.
The firm expects Tesla's financial policy to be prudent. Financial leverage steadily declined as earnings accelerated and Tesla repaid about $5 billion of debt in the last two years. Moody's estimates that debt/EBITDA dropped below 1 time at year-end 2021 and will remain at that level in 2022.
The firm also anticipates liquidity to remain very good. Tesla had a cash balance of $16 billion as of September 30, 2021. Furthermore, Moody's expects free cash flow to increase significantly in 2022, from an estimated $3.1 billion for 2021. Availability under Tesla's $2.3 billion asset-based revolving credit facility is very limited, however, because the unpaid principal balance was $1.9 billion as of September 30, 2021.
The positive outlook reflects Moody's expectation that Tesla will continue to capitalize on robust growth in global demand for battery electric vehicles as a steep increase in manufacturing capacity comes online in 2022.
In addition, the firm indicated that the rating could be upgraded if Tesla successfully expands its global footprint, maintains a strong competitive global presence as other automakers offer an increasing number of battery-electric models, and improves its product breadth. Tesla's ability to sustain an EBITA margin of at least 7% (measured excluding the contribution from emission credits) and a consistent, prudent financial policy are also important considerations for higher ratings. Further, Tesla will need to maintain very good liquidity, including ample cash and considerable committed availability under its revolving credit facility.
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