Tesla bonds analysis: low default risk, but beware of the share price

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Tesla’s risk of default is lower than that of Ford, Renault and Chrysler, so Tesla bonds appear to be a better investment than Tesla shares, whose price boom in 2020 is partly unwarranted.

tesla bonds

Immediately the good news that prompted me to write something about Tesla stocks and bonds: Standard & Poor’s, on Monday 12 October, upgrated the Tesla bond rating from BB- to B+, thus rewarding the company’s fundamentals and believing that it has good future prospects. But there are so many things to specify and highlight: if you want to invest in Tesla, you must make a careful analysis of the fundamentals of the company and its prospects, because the current exceptional growth is also due to various contingent factors. According to some financial analysts, perhaps it is better to buy Tesla bonds than Tesla shares: let’s see why.

The volatility of Tesla bonds is stable, the Tesla stock price has risen perhaps too much

I suggest you also read the article “Investing in Tesla: fundamental analysis and forecasts” to get other useful data to evaluate whether to invest in Tesla shares or bonds.

During 2020, a year obviously marked by the Covid crisis, the dizzying growth in the value of Tesla’s shares on the markets contributed to the improvement of its credit profile. In my view, at the moment Tesla bonds seem overvalued when looking at the rating, but undervalued when looking at the risk of default. If the share price plummets, however, the situation could change.

For example, let’s think of “Battery Day”, the protest to prevent the Trump presidency from imposing taxes on parts imported from China and the malfunction of the mobile phone connection in the car: factors that have led the price of Tesla shares to drop by more than 15% in the last days of September. But, while the stock price was down, the Tesla bond price remained stable.

At the moment, there are 4 types of Tesla bonds on the market: the longer term (USU8810LAA18) matures in 2025 and offers a yield of 3.5%: comparing it with other bonds of the same rating, it is the one with the lowest yield and, therefore, with the highest price. In the week that the Tesla stock price fell for the above reasons, the price of the bonds only fluctuated from 104 to 103.5, and that volatility was very low compared to what we have seen on the stock market because investors remain optimistic. In fact, compared to a year ago, today there is a lower chance that the company will go bankrupt.

Tesla default risk and credit profile

To correctly evaluate a bond investment it is necessary to observe the financial position of the company and understand if possible future market events could lead to a default. Since May last year, Tesla’s risk of default has declined thanks to a marked improvement in fundamentals. Today, according to Bloomberg, Tesla also appears to have a lower probability of default than Renault, Ford and Fiat Chrysler: in fact, some bonds issued by these companies offer much higher yields at the same maturity.

For example, if you look at Ford, recently downgraded among junk bonds, it can be seen that, despite having a B1 / BB- rating profile, the yield is higher than the equivalent Tesla bond: in fact the Ford bond maturing in 2025 (US59001KAG58) offers a yield of 4.3%, while the one maturing in 2026 (US59001KAG58) pays approximately 4.9%. The explanation for this inequality can be found in the capital structure of the two companies.

Tesla is expected to close the year with a leverage of around 4%, while Ford currently has leverage that is more than double that of Tesla. Also, in terms of debt structure, most of Ford’s bonds are due next year and therefore the company is more vulnerable to another wave of the pandemic, should there be a need for debt refinancing. Most of Tesla’s bonds, on the other hand, mature between 2024 and 2025, and this gives hope that it is more likely to plan new issues in a more stable market environment.

Tesla CDS fell 23% year-to-date, while average US high-yield bond spreads (CDX North America High Yield) increased 42%; this indicates that Tesla appears to be less risky on average than other American high yield companies.

But be careful! It is very important to consider that Tesla’s reduction of default risk and leverage is closely related to the performance of the share price. For this, the company’s creditors must constantly monitor the performance of Tesla shares on the stock market, for a more accurate assessment of its bonds.

To conclude, I believe that the improvement in Tesla’s credit profile is mainly due to the high price of the stock and, consequently, also looking at the data of its competitors, Tesla’s bonds would seem to be overvalued if you take the rating as a benchmark. and underestimate if, on the contrary, if you focus on market and default risk.

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