Fitch Analyst Hebbertt Soares notes that Tesla’s integrated business model, which bypasses traditional sales channels, may establish a blueprint for achieving top-tier credit ratings in a sector often limited by data and regulatory scrutiny.

It’s the first such rating for the residential solar market. According to Soares, this deal, backed by high-quality assets and Tesla’s unique direct-to-consumer approach, is unique. And it could redefine ABS financing standards in renewable energy.

The offer includes two tranches: a $255 million A-2 note with a weighted average life of 2.65 years and a $150 million A-3 class with a 6.2-year WAL. Both achieved AAA ratings, highlighting asset quality and deal structure.

Tesla’s use of a sequential payment structure prioritizes returns to senior bondholders and contrasts with the more typical “pro-rata” structures other solar ABS deals use. “Sequential structures have more solid cash flow results,” Soares said, and that was one factor that helped Fitch assign a AAA rating, as it better withstands potential losses.

Tesla’s sterling borrower pool also supports the top investment grade rating.

The average Tesla borrower’s 793 FICO score and 13% down payment reduce default risks. The high borrower credit quality and their commitment through a substantial down payment create a personal stake in the system. This is quite different from other models, where third-party partnerships are more common, and providers depend on commissioned sales staff or in-store pitches from big-box retailers.

Tesla’s borrowers’ scores stand out in a market where solar ABS deals are generally capped at AA due to limited historical data and regulatory scrutiny. Soares noted that this limitation typically arises from data scarcity and ongoing legal scrutiny over consumer disclosures.

The deal has multiple layers of credit protection designed to mitigate cash flow risks for investors. These include over-collateralization, which ensures the value of the assets exceeds loan amounts, and a yield supplement over-collateralization (YSOC) feature that adjusts cash flows by supplementing returns on lower-rate contracts. These mechanisms support a consistent return rate for investors and contribute to the high credit rating.

Tesla’s success may influence other solar companies’ financing strategies, but it has set a high bar.

A high-quality borrower pool, direct sales, and efficient cash flow structure make this deal a standout that competitors may need to emulate to attract similar investor confidence.

“When we look at the profile of Tesla and the pool, those were the primary drivers that led or that allowed us to assign triple A ratings for the senior bonds of this ABS,” Soares said.

Investor enthusiasm for solar ABS remains strong despite industry challenges, including recent setbacks such as SunPower’s bankruptcy and downgrades of solar ABS from Sunnova and Solar Mosaic. Including Tesla’s deal, total issuance in the solar ABS market this year has now surpassed $5 billion, marking a new record.

Tesla’s achievement may also impact financing approaches across the renewable energy sector. Tesla’s model could become a template for securing high ratings through streamlined operations and borrower strength.

But that may still be some time away. And Soares said, “at this stage we don’t see us lifting or removing the rating cap on the other originators until we have more visibility on the potential developments on the legal side.”

To offset financial ruin, the company is selling $15 billion of common stock and mandatory convertible bonds. The sale is part of an ongoing initiative to stabilize finances and protect Boeing’s investment-grade credit rating while minimizing shareholder dilution.

The financing structure lets the company count bonds as equity, hopefully eschewing concerns about its debt load, a critical factor in maintaining its credit rating.

David Erickson, adjunct associate professor of business at Columbia Business School, expects market analysts to closely watch Boeing’s latest move. A failure to maintain its investment-grade credit rating “could significantly impact its borrowing costs,” he says.

Boeing’s reliance on hybrid financing suggests an effort to balance raising cash with avoiding excessive dilution, according to Erickson. “Depending on how the mandatory convertible bonds are structured, credit rating agencies can treat them as equity, which helps Boeing raise substantial capital while protecting its credit rating.”

Boeing is raising cash without further overleveraging its balance sheet. The firm’s unique challenges, compounded over the last few years, from 737 MAX production delays to new regulatory hurdles. More recently, a labor strike has cost the company millions of dollars per day, straining its cash flows.

“Boeing’s operational issues are largely self-inflicted, compounded by management changes making them more severe than typical industry challenges,” Erickson says, emphasizing the financing’s urgency for the company. Boeing shareholders get some protection from immediate dilution, as the mandatory convertible bonds will convert into equity at a premium. “Although convertibles can dilute shares over time, they give Boeing the breathing room it needs to manage its financial outlook,” Erickson notes.            

The US IPO market is seeing renewed momentum as the 2024 presidential election approaches, with investors and analysts eyeing potential opportunities ahead. Last week marked the busiest period for IPOs since February, with four out of five companies successfully pricing their offerings and raising a combined $1.1 billion.

This resurgence follows a prolonged period of stagnation, sparking confidence that the market is turning a corner.

“In the past, after major corrections like the 2000 dot-com bubble and the 2008 financial crisis, it took several years for IPO volume to recover, even when the general stock market was on the rebound. We’re seeing similar patterns now, where IPO activity is picking up, but it will likely take more time for a full recovery,” said Jay Ritter, an IPO expert and the Joseph B. Cordell Eminent Scholar at the University of Florida.

Among the most notable IPOs last week, were Ceribell, a medical technology firm, and Upstream Bio, a biotech company, highlighting life sciences’ dominance of IPO activity. Ritter notes that life sciences have comprised 30% of all IPOs since 2013, even though many companies in this space are still in early stages and generating minimal revenue.

“Life science companies aren’t household names, but they’ve maintained a steady presence,” said Ritter. “Even in a recovering market, the fundamentals for these companies are strong.”

The IPO market is also eyeing the US presidential vote in November. Historically, volatility marks election years, but they present potential gains as investors anticipate policy changes that could spur growth. This dynamic, combined with strong stock market performance, has many companies considering IPOs to take advantage of current momentum.

“With the S&P 500 and NASDAQ hitting all-time highs, many companies feel the timing is right for an IPO,” said Ritter. “Private equity firms are eager to exit their investments, sensing this market momentum.”

While displaying some green shoots, the IPO market remains selective, and not all companies are finding success. Camp4 Therapeutics, another biotech firm, struggled to price its offering, reflecting a more cautious approach from investors.

“Valuations today are more grounded in reality,” said Ritter. “Investors are still willing to pay for growth, but they expect more established business models, especially in biotech, where timelines are long and uncertain.”

While market sentiment drives the IPO game more than economic data, according to Ritter, the market must still eye interest rates and inflation. Ritter, however, believes those macro factors take a back seat to improving market sentiment, particularly as recession fears diminish, and may provide a stronger tailwind for IPO activity.

“There’s a window of opportunity for companies considering IPOs,” said Ritter. “But timing will be key as they try to capitalize on the market’s renewed momentum while navigating potential volatility ahead.”

International companies, particularly from Europe, may also help sustain US IPO activity, making the US a continued hub for capital raising despite ongoing geopolitical tensions.

While the IPO market in the US shows signs of recovery, companies must remain cautions, as the market is still selective and election-driven uncertainty is likely to linger for some time after Election Day on Nov. 5. before his title. Now I’ve confirmed that you don’t ghost sources to your copy.