MSRM Exam Question

Professor Edward Altman

November 2018

In August 2017, Tesla Motors raised $1.8 billion in Corporate bonds, priced at 5.3%, 8-year notes. The bonds were subordinated to more senior debt and received a B- rating from S&P and a B3 rating from Moody’s. Moody’s Corporate Rating was B2.

(1) Using the credit analytics discussed in our class, and also traditional metrics, what does your group think should be Tesla’s bond rating before and after the new bond issue?

(2) Would your answer change if the firm raised an additional $2 billion in bonds to meet production objectives?

(3) What is your estimate of the Bond Rating Equivalent (BRE) as of the most recent data (Q2-2018) financials and latest stock price?

(4) Given your answers, what are your expected cumulative PD and LGD for Tesla for the next five (5) years?

(5) What are the bonds issued in 2017 now selling at?

You can work on this assignment either individually or in a group of not more than three (3) members.

Do not confer with other groups with respect to any aspect of this question. Limit your answer to no more than three (3) pages, (double spaced) plus Exhibits (no Appendices). Please make sure the typeface is clear and large enough so it is easily legible.