September 26, 2019

Breakingviews: Aston Martin gets license to kill or cure itself

by Breakingviews.

Known for its affiliation with 007, Ian Fleming’s fictional secret agent, Aston Martin Lagonda is now associated with a less impressive label: CCC. Standard & Poor’s downgraded the struggling carmaker’s credit deeper into junk territory – to CCC-plus – after it raised $150 million in new debt at a 12% interest rate. That looks pricey, but if targets for a new SUV are not met quickly and the company again runs short of cash, investors may find the yield is not enough.

Aston Martin also secured an option to borrow another $100 million even more expensively. It may need it. The company’s share price is down around 70% since its initial public offering last October, valuing its equity at around $1.6 billion. It reported a loss for the first half of the year, and issued a profit warning in July. With sales weaker than expected, the company burnt through more cash than anticipated and ended June with net debt at a stretched 4.7 times adjusted EBITDA for the prior 12 months, up from 2.3 times at the end of 2018, according to the company’s financial statements.

Escaping the cash crunch depends heavily on the success of the untested DBX, a new sport utility vehicle, so it’s no wonder creditors wanted a hefty return. The coupon may appear mouth-watering to investors when compared with the 5.8% effective yield on the Bank of America Merrill Lynch index tracking credits rated B – where Aston Martin was rated before the downgrade, although its other bonds traded at higher yields. But Aston Martin is skidding badly. Turning to the private debt market to meet cash needs isn’t uncommon, but issuing debt with an option to pay some of the interest by issuing more debt – a so-called payment-in-kind or PIK feature – less than one year after an IPO certainly is.

The bond issue will buy Aston Martin much needed time, with luck enough to get it safely over the hump of launching its new SUV. But the UK-based automaker is embarking on an ambitious product rollout in the midst of Brexit and other trade uncertainty. Even James Bond himself might consider this scenario a bit too dangerous.

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