Unsolicited s&p bond rating

[RobStark]

What this means is that pension funds and most mutual funds can't invest in Tesla convertible notes or corporate bonds.

If Tesla tries to raise money in the capital markets again it will have to pay a premium over last time.

A small premium probably but a premium never the less.

 

[TSLAopt]

What this means is that pension funds and most mutual funds can't invest in Tesla convertible notes or corporate bonds.

If Tesla tries to raise money in the capital markets again it will have to pay a premium over last time.

A small premium probably but a premium never the less.

Good point and that is frustrating.
I wonder if we'll ever be able to find the cause of the 'unsolicited' rating request... Was it an activist hedge fund short perhaps pressuring S&P to make this rating happen? I would love to know

 

[uselesslogin]

What this means is that pension funds and most mutual funds can't invest in Tesla convertible notes or corporate bonds.

If Tesla tries to raise money in the capital markets again it will have to pay a premium over last time.

A small premium probably but a premium never the less.

Good point and that is frustrating.
I wonder if we'll ever be able to find the cause of the 'unsolicited' rating request... Was it an activist hedge fund short perhaps pressuring S&P to make this rating happen? I would love to know

Why would their rules allow them to buy unrated bonds though? I was under the impression they couldn't buy the bonds before or after this rating.

 

[RobStark]

Why would their rules allow them to buy unrated bonds though? I was under the impression they couldn't buy the bonds before or after this rating.

This is true. I wrote that to mean as opposed to getting an investment grade.

S & P has ten grades that classify as investment grade from AAA to BBB-.

A speculative grade is worse than no grade IMO.

Hedge funds and high yield funds that previously purchased Tesla convertible notes will demand a premium now that Tesla notes/bonds have been labeled speculative.

 

[MikeC]

So how often are unsolicited ratings given, compared to solicited ratings?

 

[Chickenlittle]

This is true. I wrote that to mean as opposed to getting an investment grade.

S & P has ten grades that classify as investment grade from AAA to BBB-.

A speculative grade is worse than no grade IMO.

Hedge funds and high yield funds that previously purchased Tesla convertible notes will demand a premium now that Tesla notes/bonds have been labeled speculative.

I suppose that tesla can ask another agency to rate bond if they wanted to. s&P not only agency

 

[RobStark]

I suppose that tesla can ask another agency to rate bond if they wanted to. s&P not only agency

But one is enough to knock you off the list of many pension and mutual funds.

And S & P is the largest.

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So how often are unsolicited ratings given, compared to solicited ratings?

Roughly 30%.

Unsolicited ratings are on average lower than solicited(paid for) ratings.

But it is true that companies with good financials are much more likely to solicit ratings.

In the past there have been CEOs that claim there have been veiled blackmail threats if their company did not pay for a rating.

Since the 2008 financial crisis the SEC has passed rules to make it easier to make unsolicited ratings.

 

[bigez1]

This should put this "issue" into focus...

The Geniuses That Failed To Warn About The Financial Crisis Want Us To Know Tesla Is Junk - Forbes

 

[Auzie]

Demand for high yield bonds rise, demand for leveraged loans decrease

An article on bonds classification, How the US debt market offers multiple investment avenues, gives brief overview of bonds grading.
Few highlights from the article:

Tesla bonds, as rated by S&P, fall into high yield bonds, paying higher yield due to higher risk.

Investment grade corporate bonds are issued by long established companies with strong balance sheets, with low chance of defaulting on their debt.

In May, the demand for high yield bonds was strong. Money inflow into high yield bonds grew from $472mill to $744mill, in second half of May.

Barclays Capital Convertible Bond ETF (CWB), the only US listed ETF devoted exclusively to convertible bonds, has a 1.31% exposure to Tesla.

 

[Auzie]

High Yield ETF Returns

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High yield = Junk bond.

 

[sleepyhead]

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High yield = Junk bond.

Unfortunately, this does not apply to Tesla's bonds because they are not high yield. In fact they are extremely low yield at 0.75%-1.5%.

I would imagine that labelling them at b- has caused the value to go down, if anything. The bond movements are dependent almost exclusively on TSLA stock movement anyway, since they are convertible.

 

[Auzie]

Unfortunately, this does not apply to Tesla's bonds because they are not high yield. In fact they are extremely low yield at 0.75%-1.5%.

I would imagine that labelling them at b- has caused the value to go down, if anything. The bond movements are dependent almost exclusively on TSLA stock movement anyway, since they are convertible.

Graphs show ETF returns, not bond returns. See my post #29 in this thread. Barclays Capital Convertible Bond ETF (CWB), the only US listed ETF devoted exclusively to convertible bonds, has a 1.31% exposure to Tesla.

If we disregard S&P incoherent reasoning that accompanied their unsolicited classification, I tend to agree with Tesla bonds classification as high risk. Yet Tesla managed to get very favorable deal on their bond issuance. To me that is good news and attests to good financial management.

I see most of the risk inside the business, rather than outside. Competition is asleep and nowhere to be seen yet.

CEO commitment to Tesla seems to be the highest perceived risk among investors.

Also gigafactory project is at a concept stage. That might change soon.

Scaling up manufacturing might be slower than expected. As Tesla manufacturing grows, inherent risks of manufacturing get added to Tesla business risks. Manufacturing is not a compelling game so businesses outsource it to improve their performance. The only way I will feel comfortable being invested in a manufacturing giant is if that giant has some sort of edge. Tesla does claim "manufacturing innovation" as their core competence and they seem to have automated production to a highest degree possible. It will be interesting to see gigafactory project unfold.

Investors have a lot of trust in Tesla management and that trust get tested at every step of the way. Any misstep by Tesla management might adversely affect the stock price. Hence high risk.

 

[sleepyhead]

Graphs show ETF returns, not bond returns. See my post #29 in this thread. Barclays Capital Convertible Bond ETF (CWB), the only US listed ETF devoted exclusively to convertible bonds, has a 1.31% exposure to Tesla.

If we disregard S&P incoherent reasoning that accompanied their unsolicited classification, I tend to agree with Tesla bonds classification as high risk. Yet Tesla managed to get very favorable deal on their bond issuance. To me that is good news and attests to good financial management.

I see most of the risk inside the business, rather than outside. Competition is asleep and nowhere to be seen yet.

CEO commitment to Tesla seems to be the highest perceived risk among investors.

Also gigafactory project is at a concept stage. That might change soon.

Scaling up manufacturing might be slower than expected. As Tesla manufacturing grows, inherent risks of manufacturing get added to Tesla business risks. Manufacturing is not a compelling game so businesses outsource it to improve their performance. The only way I will feel comfortable being invested in a manufacturing giant is if that giant has some sort of edge. Tesla does claim "manufacturing innovation" as their core competence and they seem to have automated production to a highest degree possible. It will be interesting to see gigafactory project unfold.

Investors have a lot of trust in Tesla management and that trust get tested at every step of the way. Any misstep by Tesla management might adversely affect the stock price. Hence high risk.

I agree with this post and the risks that you pointed out. I also think that these bonds should not get a strong investment grade rating. I am okay with the junk bond rating that S&P assigned to Tesla's convertible bonds. I don't agree with their reasoning, since IMO there is a ton of execution and counterparty risk and not necessarily those risks that S&P pointed out.

When it comes to the graphs you posted: it does not show CWB, but only HYG and JNK.

 

[kenliles]

I agree with Auzie's summary post as well. As a buyer of some of these bonds in other companies (in a previous investment life), I can say from that perspective, these agency rating have less than zero effect on at least the buyer I represent (non-institutional, individual or grouped buyer - very common for these types). The question of value is tied directly to the stock-conversion and the security aspects correlate to the management dedication (performance bonus structure) and 'inferred' money backing the company (Elon's wealth in this case). After that, my kind of buyer prefers the lowest agency rating possible to juice the interest rate (the individual has already rated beyond the ability of the agency to produce a meaningful correlation to the value-proposition). my 2c

 

[Auzie]

When it comes to the graphs you posted: it does not show CWB, but only HYG and JNK.

That's all I could find, all these EFTs are a pretty good investment. My point was, the junk bonds can perform quite well.

 

[Chickenlittle]

I really like Elton's explanation of bond rating and difference with convertible bond outlook. Never thought of it that way

 

[techmaven]

I really like Elton's explanation of bond rating and difference with convertible bond outlook. Never thought of it that way

I was telling Flux that Musk's explanation was particularly cogent and fair.