Tesla, Inc. -- Moody's upgrades Tesla's ratings including CFR to B2 and senior unsecured to B3; the outlook is stable.

Rating Action: Moody's upgrades Tesla's ratings including CFR to B2 and senior unsecured to B3; the outlook is stable.

Global Credit Research - 23 Jul 2020

New York, July 23, 2020 -- Moody's Investors Service ("Moody's") upgraded the ratings of Tesla, Inc., including the Corporate Family Rating to B2 from B3, and senior unsecured rating to B3 from Caa1, and the speculative grade liquidity rating to SGL-2 from SGL-3. The outlook is stable.

The upgrade reflects Tesla's sustainable position in the auto industry as a specialized producer of pure battery electric vehicles (BEVs). However, preserving this strong position in BEVs in the face of emerging competitive challenges will depend on Tesla's progress around manufacturing efficiency and product development to achieve even broader customer acceptance at an affordable price. Moreover, Tesla's expansion prospects benefit from regulatory pressures on the auto industry to reduce emissions so Tesla's advanced position in BEVs is an important factor at the higher rating. At the same time, the weak governance at Tesla also constrains the rating.

The following rating actions were taken:

Upgrades:

..Issuer: Tesla, Inc.

.... Corporate Family Rating, Upgraded to B2 from B3

.... Probability of Default Rating, Upgraded to B2-PD from B3-PD

.... Speculative Grade Liquidity Rating, Upgraded to SGL-2 from SGL-3

....Senior Unsecured Regular Bond/Debenture, Upgraded to B3 (LGD4) from Caa1 (LGD4)

Outlook Actions: ..Issuer: Tesla, Inc.

....Outlook, Remains Stable

RATING RATIONALE

The ratings take into account Tesla's progress and the expectation of greater financial stability going forward, with relatively solidly margins although high financial leverage and sizeable investment needs will continue for some time.

After considerable start up challenges, Tesla has significantly ramped-up sales and production of the Model 3 out of the Fremont, California facility, and successfully launched the Model Y earlier this year. The company also opened a production facility Shanghai, China and plans very substantial battery and production operations in Austin, Texas along and Berlin, Germany.

With higher production levels and better cost absorption, as well as a broadening manufacturing footprint, Tesla's EBITA margin should be in the mid-single-digits. This is despite the broad economic downturn and uncertainty resulting from the coronavirus outbreak, and compares favorably against other auto producers. Tesla's reported EBITA margin has risen steadily from -6.9% for fiscal 2017, to about 8.5% for the last twelve months ending June, 2020. A significant portion of this margin (approximately 5 percentage points) are due to the sale of $1 billion in regulatory credits during the twelve months through June. It will be important for Tesla, over time, to strengthen the profitability of its core BEV operations and to become less reliant of the sale of these credits. Finally, the company reported $8.6 billion in cash at June 30, 2020, which will provide much-needed liquidity as the company faces increasingly challenging market conditions and investment demands.

Even with manufacturing challenges, Tesla has a considerable lead in the global BEV market, with a 90% share in the US. BEVs are a small, specialized segment of the electric vehicle market at about 1.5% of total US auto sales in 2019, but will gain penetration globally. Tesla does not compete in what will be the much larger hybrid electric vehicles, nor does Moody's anticipate that Tesla will develop products in that market. Moody's expects that Tesla will invest heavily in order to capitalize on BEV expansion and to maintain its leading position in the sector.

Emission regulations not only support Tesla's BEV sales, they also afford the company with a critical revenue/earnings stream through the sale of excess emission credit to OEMs that fail to meet emission requirements. During 2019, Tesla's sale of emission regulatory credits amounted to $594 million, which fall directly to earnings as there is no direct or incremental cost associated with Tesla's generation of these credits.

Nonetheless, Tesla will face considerable challenges, not the least being the deteriorating global economic outlook following the spread of the coronavirus outbreak. The automotive industry is one of the sectors that will be most severely impacted, as we expect global automotive sales will fall by at least 20% during 2020. Moody's believes BEVs will be less negatively impacted by the coronavirus pandemic and, as a result, anticipates Tesla's 2020 sales growth will be in the mid-to-high single-digits -- considerably outperforming the industry, but significantly lower than the company's historic pace.

Balancing this much more challenging growth environment against the company's aggressive expansion and investment plans will be challenging. Further competitive challenges will be posed during the next two years as other OEMs begin to launch a broader array of BEVs.

Tesla has a sound liquidity position as it contends with these challenges. At June 2020, the company's cash position approximated $8.6 billion. This should afford ample ability to cover the approximately $3.2 billion of debt maturing during the coming twelve months, and to fund a potentially sizable capital expenditure and expansion program. This cash position, and its sufficiency relative to likely cash requirements during the coming twelve months, support the change in Tesla's speculative grade liquidity rating to SGL-2 from SGL-3.

Although an automotive producer, as a maker of BEVs Tesla's carbon transition risk is considerably lower than peers, and is mostly limited to the carbon output in its production and from the electricity used in the recharge of its car batteries during use. However, important additional risks are posed by Tesla's governance structure. There is considerable latitude to the company's CEO, Elon Musk, with a board that has a mix of inside and outside directors. In addition, Mr. Musk's executive responsibilities with outside ventures such as SpaceX could tax his ability to adequately focus on Tesla's challenges, including the need to address the poor returns and weakened competitive position of the company's solar business.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlook reflects Tesla's progress in establishing a more profitable and competitively sustainable position in the BEV market, balanced against the challenges of: a global economic slowdown due to the coronavirus; increasing competition in the BEV space from established OEMs; and the need to transition profitability away from the heavy dependence on the sale of regulatory credits and toward the sale of vehicles.

Tesla's rating could be upgraded if the company continues to make operational progress through the ramp-up of its Shanghai facility and new operation in Texas, continues a successful launch of the Model Y, and continues steady progress towards making the Tesla product lineup more affordable and profitable.

Metrics that would support an upgrade include: EBIT margin that can be sustained above 5%; debt/EBITDA approximating 4x; and EBITA/interest above 2x.

The ratings could be downgraded if, as occurred during 2018, the company begins to encounter operational problems managing its aggressive global manufacturing and product expansion. Metrics that would contribute to a downgrade include: EBITA margin being sustained below 4%; debt/EBITDA approaching 6x; and EBITA/interest below approximating 1.5x.

Tesla, Inc., headquartered in Palo Alto, California, is the world's leading manufacturer of battery electric vehicles, and is also a major producer of energy generation and storage systems. It had 2019 revenues of $24.6 billion.

The principal methodology used in these ratings was Automobile Manufacturer Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1062773. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

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These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Bruce Clark Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Robert Jankowitz MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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