When Moody's did their credit rating increase in January (conveniently the day before Q4 results), they used up to Q3 2021 results. For the financial factors they listed to further upgrade, two of the interesting ones were these:
- sustained EBITA (Earnings Before Interest, Tax, and Amortization) of 7% or higher (excluding reg credits)
- considerable commitment available under revolving credit facility
I recalculated EBIT (Earnings Before Interest and Tax) using the quarterly slide decks instead of EBITA. Depreciation and amortization are lumped together so it was difficult to get an accurate amortization figure. Plus, EBIT makes the calculation more conservative than using EBITA.
End of Q3 2021 ($millions) | Q4 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Trailing 12-Months |
Revenue excl. credits | 9,942 | 9,871 | 11,604 | 13,748 | 44,895 |
EBIT (excl. credits) | 198 | 88 | 978 | 1,688 | 2,952 |
EBIT % (excl. credits) | 1.99% | 0.89% | 8.43% | 12.52% | 6.58% |
| | | | | |
End of Q1 2022 ($millions) | Q2 2021 | Q3 2021 | Q4 2021 | Q1 2022 | Trailing 12-Months |
Revenue excl. credits | 11,604 | 13,748 | 17,405 | 18,077 | 60,564 |
EBIT (excl. credits) | 978 | 1,688 | 2,370 | 3,046 | 8,082 |
EBIT % (excl. credits) | 8.43% | 12.52% | 13.62% | 16.85% | 13.34% |
When Moody's did their calculation, Q4 2020 and Q1 2021 were both narrowly profitable, and below their 7% threshold, so their hesitancy is understandable. However, since Q2 2021, the EBIT margins have been growing strongly and are well above the 7% threshold they laid out in their report. As Tesla has had very strong EBIT for four straight quarters, seasonality no longer has a significant impact on their financial performance.
On the revolving credit facility, they previously had drawn $1.9B of the $2.1B revolving credit facility in Q3 2021. However, they have essentially paid off all of their recourse debt as of the end of Q1 2022, so this credit facility should now be fully available.
Based on both of these factors, from a financial perspective, Moody's has no reason not to upgrade Tesla shortly after the 10-Q comes out. They might keep waiting until the supply chain issues and factory ramps are looking better before upgrading though, but there's no doubt now that the financials are good enough for investment grade.