Aston Martin Holdings (UK) Downgraded To 'CCC-' On Weak Liquidity; Ratings On Watch Negative On COVID-19 Uncertainty

  • U.K.-based luxury sports car manufacturer Aston Martin Lagonda (AML) is planning to raise £536 million in new money (before fees) via a £171 million share placement and £365 million rights issue to bolster its weak liquidity position and reset its business strategy.
  • We believe that absent the successful execution of the planned placement and rights issue, AML will experience a liquidity crisis that would likely lead to a restructuring.
  • We also believe that even if AML successfully executes its placement and rights issue, declining sales of core sports cars and uncertainties related to COVID-19 will likely weaken its financial performance and result in further liquidity pressure over the next six-to-12 months.
  • We are therefore lowering our issuer and issue ratings on AML to 'CCC-' from 'CCC+'. The recovery rating remains '4'.
  • At the same time we are placing all our ratings on AML, including our 'CCC-' issuer credit rating, on CreditWatch with negative implications.
  • We plan to resolve the CreditWatch once AML has completed its placement and rights issue and we can assess and quantify the impact of COVID-19 on AML's financial performance and liquidity position.
Weaker-than-expected results and continued high cash burn have left AML needing a rescue deal to survive its current liquidity crunch. Over the past 12 months, AML has experienced weaker-than-expected conditions in some of its core end-markets and declining core sports car sales volumes, as well as depressed profitability and weak cash flows. Despite this, AML has continued to invest heavily in R&D and its capital expenditure (capex) has remained high as it continues its strategy of launching new cars including the DBX, the Valkyrie, and the Valhalla. As such, its free operating cash flow (FOCF) has stayed significantly negative as its working capital position has deteriorated and its liquidity has come under more and more pressure.
Its working-capital-related cash outflows far exceeded our expectations at end-fiscal 2019. Its cash outflow was £84 million versus our previous expectation of a slight working-capital-related cash inflow at the end of the fiscal year. To fund this high cash burn and working capital outflow, AML has had to seek new funding options multiple times in the past 12 months including a $190 million mirror bond issued in April 2019, $150 million 12% cash/PIK toggle notes issued in September 2019, a £20 million bilateral loan from JP Morgan in late 2019 (now repaid), and £55.5 million of short-term working capital support from Yew Tree, a vehicle controlled by Mr. Stroll (note: this facility will increase to £75.5 million in the coming days under the new terms of the recently revised placement and rights issue). We note that AML's revolving credit facility (RCF) is effectively fully drawn, and of the £108 million of cash reported on balance sheet at end-fiscal 2019, the majority is either linked to contractually refundable customer deposits or restricted in China. AML is now seeking to raise £536 million (before fees) via a new £171 million placement and £365 million rights issue, planned for completion in early April. We note that under the terms and conditions of the short-term working capital facility from Yew Tree, the £75.5 million short-term working capital line will be repaid from proceeds from the £536 million placement and rights issue.
As part of this planned transaction, Mr. Stroll and his consortium will take a position of about 25% of the company's post-placing issued share capital for about £2.25 per share, raising about £171 million in the process. AML will also launch a rights issue with the aim of raising £365 million. In our view, despite being underwritten, the rights issue carries a degree of execution risk. We also note that since first announcing the transaction, AML's share price has weakened significantly due to the effect that COVID-19 uncertainty is having on the global financial markets, leading to the consortium to renegotiate the terms of the planned placement and rights issue. In our view, if markets were to continue to deteriorate and AML cannot successfully complete its planned £536 million placement and rights issue, then it will face a liquidity crisis that would likely lead to a restructuring.
Even with £536 million of new money and production of the DBX coming online, market headwinds including the impact of COVID-19 will likely result in further pressure on AML's financial results and liquidity. Absent the potential negative impact of COVID-19, AML's core sports car sales are already forecast to decline further in 2020, with continued pricing pressure in some core markets. Management has guided that AML will exhibit a £100 million outflow of cash for working capital in 2020 as AML pushes to get the DBX to production. Most of this cash will be used in first-half 2020 as DBX production ramps up at its St. Athan plant, with first deliveries of the new DBX slated for summer 2020. Given the pressure on the core sports car business and continued high cash burn, the flawless delivery of the DBX to market, along with healthy demand supporting future production, is also key to AML's survival.
Although hard to quantify at this stage, COVID-19 will undoubtedly affect AML's core sports car sales in the first half of 2020 most notably in China and Asia-Pacific (where AML sold about 1,300 cars in 2019) but also in EMEA and North America as the economic impact of the pandemic gathers pace in these regions. It could also potentially weigh on planned DBX deliveries/sales in the summer if the pandemic continues to escalate. AML has a global supply chain and sources many parts from the EU and also China, some of which are critical to production and assembly of its cars in its Gaydon and St. Athan plants. If AML ran out of these critical parts then it would likely have to halt production. At this stage, we do not include specific downside in our base case from COVID-19 in terms of car sales or effects on its supply chains, but will update our forecasts when more information becomes available.
We plan to resolve the CreditWatch once AML has completed its rights issue and we can assess and quantify the impact of COVID-19 on AML's financial performance and liquidity position for the next six months.
We could lower the rating if AML is not able to complete its placement and rights issue and raise £536 million of new funds as planned, or if COVID-19 were to severely disrupt core sports car sales or supply chains to the point where AML had to cease production, further weakening cash flows and negatively affecting liquidity.
  • We are lowering the issue ratings on the £285 million 5.75% senior secured notes due 2022 (including the £55 million tap issuance) and the $400 million and $190 million 6.5% senior secured notes and the $150 million 12% cash/PIK notes to 'CCC-' from 'CCC+'. The recovery rating is '4' (rounded estimate 45%).
  • We note that, since our last publication, AML agreed a £75.5 million short-term working capital facility from Yew Tree, and this facility ranks ahead of the existing senior secured notes. Under the facility's terms and conditions, it will be repaid from the proceeds of the £536 million placement and rights issue. We include it as a priority liability until such time as it is repaid.
  • A comprehensive security and guarantee package support the ratings on the above-mentioned notes, but they are constrained by the significant prior-ranking liabilities, including an £80 million super senior RCF, a £150 million receivables financing facility (recently reduced from £200 million), the £75.5 million Yew Tree facility, and a £37.5 million inventory facility in China.
  • In our hypothetical default scenario, we assume insufficient liquidity undermining the company's ability to service its debt obligations due to sizable capital expenditures and declining revenues.
  • We value the business as a going concern due to its strong brand name and market position.
  • Year of default: 2020 (second half)
  • Jurisdiction: U.K.
  • Emergence EBITDA: £157 million
  • Maintenance capex is assumed at 5% of historical three-year annual average revenues, based on the company's average minimum capex requirement trend.
  • Standard cyclicality adjustment of +15% for the Auto OEM industry.
  • We maintain our operational adjustment of 15% to adjust the increase in sales volume due to the ramping up of sales with the extension of core models and car launches, with successor models for the new DBX SUV in 2020.
  • Implied enterprise value multiple: 5.0x - Anchor multiple for the Auto OEM industry is 5.5x, but we use 5.0x because Aston Martin is not part of a larger automotive group and hence lacks diversity and scale compared to its peers. However, we believe the company possesses a strong brand name with some next generation products in the pipeline, so we maintain the 5.0x multiple for the valuation.
  • Gross recovery value: £785 million
  • Net recovery value for waterfall after admin. expenses (5%): £745 million
  • Priority claims: £342 million (1)(2)
  • Estimated senior secured debt claims: £895 million
  • Recovery expectations: 30%-50% (rounded estimate: 45%)
(1)All debt amounts include six months of prepetition interest.
(2)We assume RCF to be 85% drawn at default.
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