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Looking increasingly IG

04 February 2020 by jbchevrel

Tesla inc. (TSLA) 5y CDS rallied another -10bp today. The spread is 135bp mid on our London close. For reference, until last mid-October, this CDS had been trading roughly between 400bp and 850bp. That range was broken on the downside last October, when TSLA wowed the markets breaking lower than 350bp on Oct24, after it reported that was profitable in Q3. Auto gross margin ex-credits north 20% and positive CF generation have been welcomed by the bond market. Today it is closing tighter than the 5 widest names in CDX IG s33. Bloomberg put out a piece where they note that TSLA has more cash than ever, which could help credit rating agencies upgrade the name. Indeed, TSLA ended Q4 with a record $6.3B of cash, up nearly $1B from Q3. S&P currently rates Tesla B-, 6 steps below IG, with a positive outlook. It said in November it could upgrade the company if, among others, FCF is at least around break-even and cash at minimum $2.5B. Cash is more than double that and Q4 was the 3rd consecutive quarter of positive FCF. Moody’s has outlined similar upgrade criteria. Elsewhere, the CDS index markets are shrugging off the corona-virus, following higher equities, despite the climb in number of reported cases (now >20,600) and associated deaths (426, including one outside of mainland China in Hong Kong). From London close, we have all indices markedly tighter Main -2 XOver -10 Snr -3 Sub -7 IG -2.5 HY -10 EM -8.5.