Moody's upgraded Tesla's credit rating to one notch below investment grade on Tuesday, as strong demand for electric vehicles and prudent financial policy drives improvement in the company's credit profile.
The rating agency boosted Tesla's long term corporate rating from Ba3 to Ba1 with a positive outlook, highlighting the improvements in the company's margins, profitability and liquidity.
S&P currently rates the company at BB+ with a positive outlook, putting the company on the cusp of investment grade status.
Analysts said the timing of upgrades depends a lot on how the company executes its ambitious growth plans. Moody's highlighted several challenges the company must overcome, including broadening its product offering and staving off increased competition in the electric vehicle space from global manufacturers that are playing catch-up.
"The ratings 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," wrote Moody's. "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."
Tesla has repaid about US$5bn of debt in the past two years, bringing leverage below 1x at the end of 2021. The company had a cash balance of US$16bn at the end of September, 2021.
Tesla reports fourth quarter earnings after the market close on Wednesday.