Tesla bonds assigned 'junk' status by S&P

UPDATED: 5/28/14 12:30 am ET - correction

Editor's note: An earlier version of this story had an incorrect figure for the number of levels below investment grade represented in a B- rating.

LOS ANGELES -- Its shares may be the darling of Wall Street, but Tesla Motors Inc. on Tuesday received a far less rousing recommendation from bond raters at Standard & Poor’s Corp. -- which assigned the electric-vehicle maker a B- rating, or “junk” status.

Companies are given junk-bond ratings when Wall Street determines there is an increased possibility of default.

But for savvy investors, having junk bonds in a poorly rated company can pay much higher returns than those from blue-chip companies, because junk-rated companies have to pay higher interest rates to gain access to investors’ capital.

Of course, the trade-off of potential default means bondholders could see much of their principal vanish.

In describing the portfolio as “vulnerable,” S&P stated that Tesla has a “narrow product focus, concentrated production footprint, small scale relative to its larger automotive peers, limited visibility on the long-term demand for its products and limited track record in handling execution risks that could arise in managing high volume parallel production.”

Even with the junk rating -- six notches below investment grade -- S&P stated that the Tesla bonds are nonetheless “stable.”

The rating “reflects our expectation that the company will sustain its recent improvement in gross margins over the next 12 months,” S&P said in a statement.

S&P estimated that, in case of a default, investors likely would recover 30 to 50 percent of their investment.

So far this year, Tesla has issued $920 million of 0.25 percent unsecured convertible senior notes due in 2019 and $1.38 billion of 1.25 percent unsecured convertible senior notes due in 2021. Last year, the company issued $660 million in unsecured convertible senior notes due in 2018.

The funds are to be used to finance construction of two battery gigafactories as well as extended product development for the Gen III compact electric vehicles.

Tesla shares closed today at $211.56 in Nasdaq trading. The 52-week range for the stock has been $88.25 to $265.

You can reach Mark Rechtin at mrechtin@crain.com -- Follow Mark on Twitter: @markrechtin

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