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It is not totally surprising that retail traders and mutual funds have given Elon Musk’s SpaceX a $2tn valuation, despite it having revenue over the past year of just $20bn. But anyone who thought such a cocktail of Yolo and Fomo could never spread to the wonky, sober world of bonds might want to think again.
SpaceX is about to sell $20bn of bonds, following large debt issues from other tech companies such as Alphabet and Meta Platforms. The big difference: where they are hugely profitable software-centred companies, SpaceX is lossmaking to the tune of $9bn a year. Nonetheless, rating agencies S&P Global Ratings, Moody’s and Fitch have assigned Musk’s company investment-grade scores within the BBB band.
Rating agencies have pretty strict criteria for their imprimaturs, based on existing debt levels and cash flow. SpaceX, reassuringly, has little debt and $101bn of cash after its initial public offering on June 12. But its lack of profit makes the rating unusual. Perhaps the agencies, such as index provider Nasdaq, decided that SpaceX’s considerable quirks justify reconsidering previously held norms.
Investors make their own minds up about the riskiness of bonds; the yield at which they trade will reflect investors’ empirical verdict of Musk’s conglomerate and its financial prospects. But rating agencies’ views matter too. For some buyers, including insurance companies, a solid rating can act as permission to buy; the lack of one can put a security off limits.
In SpaceX’s case, perceptions of creditworthiness for now hang on Starlink. The satellite telecom service is the company’s only profitable division, with $8bn of trailing annual ebitda. It also needs capital, which means the company is likely to tap markets again. The challenge is that the two other divisions, space and AI, remain small, speculative and profligate.
Granted, it’s not clear bonds are the best way to address this. SpaceX’s exorbitant valuation of roughly 100 times revenue suggests that selling more stock might make sense. Still, the interest payments on the bonds will be lower than the temporary, and onerously expensive, “bridge loans” SpaceX took out tied to Musk’s purchase of Twitter. Establishing a liquid market for the company’s debt is a worthy long-term goal.
Ultimately, SpaceX is rational to exploit its unprecedented gravitational pull. Market gatekeepers, including index providers and investment banks, have so far proved willing to tweak traditional templates for a company that is both highly valuable and deeply unconventional. It’s just that if the market mood changes — and SpaceX shares have already fallen 30 per cent from last week’s peak — they may wish they hadn’t.
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