Plenty of companies invest their cash in financial markets to earn a return:
(ticker: AAPL), which has one of the largest corporate cash hoards, owns nearly $77 billion of corporate debt and $28 billion in Treasuries. When credit analysts calculate those companies’ net debt levels, the holdings in Treasuries and corporate bonds are seen as similar to cash, so the value of those holdings offsets companies’ net debt levels.
That works because the securities are mostly in regulated markets, which should make them easy to liquidate in exchange for cash if the company needs to use it. But when Tesla’s (TSLA) Bitcoin purchase made it one of the first large-cap companies to add cryptocurrency to its investment mix, it raised the question of whether those holdings should offset debt levels in the same way as a Treasury or investment-grade corporate bond.
S&P Ratings says no. The central problem, S&P analysts wrote in a note this week, is that cryptocurrency isn’t always easy to convert into U.S. dollars in times of pressure, especially for traders who own large amounts.
“We believe investments should be able to be quickly liquidated and not require deep discounts. In the case of bitcoin, this is directly linked to the available market to quickly sell large volumes of bitcoin combined with the volatility risk in today’s environment,” the analysts wrote in their note. “While there are exchanges to buy and sell digital currency, the fluctuation in daily prices and lack of regulation create operational and legal risks.”
S&P’s last ratings action on Tesla was an upgrade in December 2020, before it announced its cryptocurrency stake. But because the car maker owns Bitcoin—and not, say, Treasuries—that investment isn’t counted as cash, and its net cash position is $1.5 billion lower than it would be otherwise.
S&P Ratings analyst Shripad Joshi told Barron’s that S&P looks at Bitcoin the same way it would an illiquid equity stake in a joint venture, or another type of asset that can’t be easily sold. The firm is also following the example of international accounting regulators, the analysts pointed out in their note.
“U.S. accounting standards setter the Financial Accounting Standards Board currently views digital currency as an intangible asset, thereby not giving it the same status as liquid investments that companies hold on their balance sheets,” the analysts wrote. “The International Accounting Standards Board also considers digital currency as a nonfinancial asset for accounting purposes.”
This isn’t likely to dent Tesla’s credit rating any time soon, as the company’s $17.1 billion of non-Bitcoin cash more than offsets its $10.9 billion of debt outstanding at the end of the first quarter. But companies should treat S&P’s note as a reason for caution in cryptocurrency markets—for now, at least.
“In our view, the reported value of any digital currency held on a company’s balance sheet is not like accessible cash and will not be used in our net debt calculation in the case of Tesla,” the analysts wrote. “This will appropriately reflect the market and regulatory risk in digital currency in today’s environment. If regulations governing digital currency move towards greater acceptance, we may consider digital currency more akin to accessible cash.”
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