Bumgt6927 Creativity And Innovation - Assessment Answer

In our view, the reason given by moody for and S&P are backed with proper financial risk and debt analysis. When the bond was announced Moody gave a B3 rating this means that all abrogation's of rate B are speculative hence are subject to high-risk factors (Kennedy Jollineau, Tanlu, and Winn, 2012). In our view, a B- will be well deserved and fair enough given the circumstances of operation and debt situation at Tesla

The downgrade that has been done serves as an alarm to the investors. The Caa1 rating of the unsecured notes mirrors the lesser position of the notes with respect to the organization's $1.9 billion anchored credit office.

Our reasoning behind Tesla’s bond rating B

The rating is as a result of significant, delay and low production rate that is outmatched by customer demands and bookings. The company has in the past suffered a lot of pressure on it liquid assets, there is a shortfall in cash flow from 2017. some of the redeemable bonds are close to maturation i.e. $230 million is expected to mature in November 2018 while another $920 million will mature in 2019. As a result, there is a looming crisis. This can warranty the B- rating. Model 3s is one of the most demanded luxury vehicles from Tesla, the production has not yet reached the estimated 5000 units weekly. This is has resulted to as the company shift of this target from 2017 has still not been met in June 2018 which was the ultimatum. It is still unclear if the target of 10,000 units will be met by the end of 2018.

Tesla's liquidity comprises basically of $3.4 billion in real money and securities at December 31, 2017. The organization likewise has direct accessibility under the $1.9 billion ABL office. This liquidity position isn't sufficient to cover: 1) the roughly $500 million in the least money that we evaluate Tesla must keep up for typical tasks; If a high option capital reserves are maintained by Tesla, then they will require about $ 2 billion to maintain their operations this would be necessary for them if there is need to expand and maintain the 10000 units weekly target. All redeemable bonds will gain more than $1.2 billion by mid-2019. As a result, Tesla may find its self not sustaining this cash needs to settle the mature debts hence they may borrow more (Moody.com,2018).

According to S&P the B- unsolicited rating was backed with numerous reasons which we found supportive to the rating. This rating is usually for non-invective companies which have a high-risk bond but high return when speculation is right. According to S&P press statement "We also assigned our unsolicited 'B-' issue-level and '4' unsolicited recovery ratings to the company's $920 million 0.25% unsecured convertible notes due2019, $1.38 billion 1.25% unsecured convertible notes due 2021, and $660million unsecured convertible due 2018. The '4' recovery rating indicates our expectation for average recovery (30%-50%) for the noteholders in the event of a payment default." If Tesla is able to raise an additional 1.6 billion to cover its operation and build the gig production line then the production target of 500units weekly will be met. As a result, the cash flow will be much higher hence stable condition.

Conclusion

In concussion, we find that the current rating by both Moody and S&P could go down further if the production of the latest Model 3 has technical issues. this rating can also be further affected by the ability of the company to raise enough finances to cover its operational cost in 2018 and part of 2019 as the maturity of bond issued earlier nears. If the Production of model 3 live up the expectation of the company and clients this rating is bound to change positively.

References

Kennedy Jollineau, S., Tanlu, L. and Winn, A. (2012). Evaluating Proposed Remedies for Credit Rating Agency Failures: Improving Independence and Justifying Departures from Quantitative Credit Rating Models. SSRN Electronic Journal.

Moodys.com (2018). Moody's assigns B2 CFR to Tesla, B3 to unsecured notes; outlook is stable. [online] Moodys.com. Available at: https://www.moodys.com/research/Moodys-assigns-B2-CFR-to-Tesla-B3-to-unsecured-notes--PR_370922 [Accessed 6 Sep. 2018].

Moodys.com (2018). Tesla, Inc. Credit Rating - Moody's. [online] Moodys.com. Available at: https://www.moodys.com/credit-ratings/Tesla-Inc-credit-rating-823642219 [Accessed 6 Sep. 2018].

Wang, T. (2016). Time-Varying Rating Standards and the Distorted Incentives of Credit Rating Agencies. Global Credit Review, 06, pp.21-39.