Tesla bonds: a better junk, until the stock market says so

Bonds

Althea Spinozzi

Fixed Income Strategist

Summary:  Tesla's credit outlook has improved during 2020 as shares were rising. At the moment, the company's bonds look expensive for its rating and cheap in term of default risk. However, everything can change as soon as the stock price loses steam.


As my colleague Peter Garnry mentioned in his article, Tesla shares continue to be at the forefront of the stock market's noise. Just yesterday, shares were down 6% before the big "Battery Day" when no major news was shared with investors.

However, what is happening with Tesla bonds?

Tesla has four bonds outstanding with the longest maturity being 2025 (USU8810LAA18), which is also the most traded bond. The company's 5-year bond is offering a yield of approximately 3.5% for a B+/B3 rating, which is the lowest that comparably rated bonds can offer on similar maturities.

If we take Ford as an example, which was recently downgraded to junk, we can see that that for a better rating profile (B1/BB-) we get paid more. The Ford bond with maturity 2025 (US59001KAG58) is offering a yield of 4.3% while the one with maturity 2026 (US59001KAG58) is paying around 4.9%.

When investing in bonds is critical to think about the financial position of a company and whether future market events can expose an investor to default. Since May 2019, Tesla's default risk has declined because of improved liquidity and operating fundamental. According to Bloomberg, Tesla looks less likely to default on its debt compared to companies such as Renault, Ford and Fiat Chrysler, which at the moment are offering much lower yields on same bond maturities.

Based on the company's capital structure, Tesla should end the year with a leverage of around 4%. The one of Ford is more than double than that at the moment. Also, in terms of debt structure, Ford has the biggest chunk of bonds expiries throughout all the next year. The majority of Tesla's bonds expire in 2024 and 2025, making Ford very much vulnerable to refinancing amid the second or even third wave of coronavirus pandemic.

Improving default risk and financial leverage has a lot to do with skyrocketing stock performance since the debt-to-market capitalization continues to widen as the stock price rises. This is why Tesla bondholders need to pay attention to price development in the stock market, in order to assess the bonds' risk of default better.

In conclusion, we believe that Tesla improved credit outlook has a lot to do because of its ever high stock price. Within this context, compared to peers, Tesla's bonds looks too expensive for its rating, but much cheaper in terms of risk. 

In the meantime, Tesla CDS has fallen to new lows since the beginning of the year. In contrast, the CDX North America High Yield, which is a gauge of overall high-yield corporate risk in North America, has risen in the same timeframe.

Source: Bloomberg.
Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.