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Net Debt: Why Digital Currencies Like Bitcoin Are Not Akin to Cash In Our Ratio Analysis

Tesla bought $1.5 billion worth of bitcoin in January, and subsequently announced it will start to accept bitcoin as a means of payment, subject to applicable laws and initially on a limited basis. While it is still atypical for companies to acquire digital currency, this may be just the beginning of a trend. For now, at least, S&P Global Ratings sees cryptocurrency as a risk in our debt calculations.

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Factoring In Digital Currency In Our Debt Metrics

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 International Accounting Standards Board also considers digital currency as a nonfinancial asset for accounting purposes.

S&P Global Ratings considers two key factors relative to cash and cash equivalents, as well as other investments, to determine if they can be used in our net debt calculation: accessibility and liquidity.

Accessibility focuses on a quick conversion of the investment held into cash, if needed to pay down debt, for example. We believe investments should be able to be quickly liquidated and not require deep discounts. In 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. While there are exchanges to buy and sell digital currency, the fluctuation in daily prices and lack of regulation create operational and legal risks. At the same time, the value of bitcoin and other cryptocurrencies cannot be ignored. So while we will not treat bitcoin as equivalent to cash we may consider this qualitatively in certain cases – for example via the capital structure modifier in our Corporate Methodology.

Liquidity relates to ease of access to regulated markets to buy and sell the investments. In the case of a digital currency like bitcoin, this is connected to regulatory risk. We also exclude these arrangements from sources of liquidity in our liquidity analysis of nonfinancial corporates.

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. 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.

Related Research And Criteria

This report does not constitute a rating action.

Primary Contact:Shripad J Joshi, CPA, CA, New York + 1 (212) 438 4069;
shripad.joshi@spglobal.com
Leonard A Grimando, New York + 1 (212) 438 3487;
leonard.grimando@spglobal.com
Secondary Contact:Michael P Altberg, New York + 1 (212) 438 3950;
michael.altberg@spglobal.com
Research Assistant:Rohina L Verdes, CA, Mumbai

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