If you’re reading this, chances are you’re more familiar with Tesla Motors than Wall Street. So who is Standard & Poor’s (S&P) and what does it mean that they have given Tesla bonds a junk rating?
According to their website, “With offices in 25 countries and a history that dates back more than 150 years, Standard & Poor’s Ratings Services provides high-quality market intelligence in the form of credit ratings, research, and thought leadership.” They publish financial analyses on stocks and bonds, but they’re renown for their index of 500 companies that gives insight to the general health of the stock market.
“We expect global competition for alternative fuel vehicles to intensify over the next few years as competitors penetrate this market through improved products,” the S&P report said. “We believe there is considerable uncertainty in Tesla’s long-term prospects and believe that the company is less likely (compared to larger, more established automakers) to successfully adapt to competitive and technological displacement risks over the medium to long term.”
When bonds are given a junk rating, all it means is that they’ve fallen below a certain bond credit rating. In Tesla’s case, it received a B- rating, which is about the 16th grade from the top. When Tesla wants to borrow money, the company will likely experience a higher interest rate to offset the risk. It also limits the interest of potential investors who may be more inclined to put their money in bonds with better ratings.
AutoGuide.com reports that S&P said its long-term assessment of Tesla Motors is due to its narrow product portfolio, concentrated production, and small footprint relative to other auto makers. Tesla’s only current model is the Model S, with a companion Model X SUV having been delayed. But investors are waiting with bated breath for Tesla’s “Gigafactory” which will help the automaker rely less on outside battery suppliers.