Aston Martin Went Public a Year Ago—and Then the Wheels Fell Off

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The British luxury carmaker best known as the brand of choice for fictional spy character James Bond is no longer receiving carte blanche from investors.

Aston Martin Lagonda, manufacturer of the $280,000 DBS luxury sports car, has had to pay a steep premium to bondholders in order to sell $150 million worth of debt to keep the company liquid amid sagging demand in Europe.

The company, whose shares have plunged roughly 70 percent since listing on the London Stock Exchange last October, pitched itself, as Ferrari did, as a luxury goods company rather than a carmaker in order to gain a better standing among investors.

It hasn’t worked out so well. It needed to go back to the markets yet again, this time with a hefty 12 percent coupon on higher-tier debt secured against company assets; the maturity date is set for April 2022.

Earlier this year, the British carmaker sold $190 million of equivalent senior-secured notes at a 6.5 percent coupon during a private placement in April. The marked increase in funding costs suggests capital markets have taken a dimmer view of the company’s solvency prospects.

In the meantime, Standard & Poor’s cut its credit rating further into junk territory and Moody’s downgraded its outlook on the back of the debt sale.

Russ Mould, investment director at brokerage house AJ Bell, told The Guardian the interest rates were a major red flag. “History tells us that companies with high debt repayment obligations (…) can get into real trouble in a market downturn if earnings are hit and they struggle to service the debt,” he told the UK daily.

Management had already signaled during its first-half earnings conference call that it may need another loan.

Aston, which has filed for bankruptcy multiple times in its 100-year-history, is in the midst of a crucial second half in which it would be cutting marketing costs as well as production volumes by roughly 4,000 cars.

The company is pinning its longer-term hopes on its first SUV, the upcoming Aston Martin DBX, which starts production in the second quarter of next year, reportedly at a retail price of around 150,000 pounds ($185,000). It hopes to follow that up with a battery-electric version that will be the first production model sold under the resuscitated Lagonda brand. Both are linchpins in the carmaker’s so-called Second Century growth plan.

The exotic carmaker is latching on to a trend that has seen upscale entries— the Lamborghini Urus and the Rolls Royce Cullinan to name two—attract new customers to the brands with bigger models. This strategy paid major dividends for Porsche when it first launched the Cayenne back in 2005, allowing it to finally break into the growing affluent Chinese luxury car market where buyers eschew sports cars in favor of roomy prestigious SUVs.

The problem for Aston Martin is however that auto manufacturing is traditionally a capital-intensive business especially for the sub-scale manufacturers that cannot spread out investment costs over high volumes. Rising capital expenditure to fund its product pipeline drained its cash balance to the tune of 162 million pounds in the first half, just as underlying cash earnings (adjusted EBITDA) plunged by nearly four-fifths to 22 million pounds.

The result was a massive funding shortfall that had to be partially compensated by tapping debt markets via the April private placement. Net debt, a key metric for bondholders, rose 30 percent in the first half to 732 million pounds. This equates to three years’ worth of adjusted EBITDA, effectively a proxy for cash earnings.

This figure could climb further, as the company is entitled to borrow a further $100 million at the same 12 percent rate should 1,400 orders for the DBX be driven off the lot in the next nine months, according to the company.

Aston Martin had to revise lower its 2019 wholesale volume forecast in late July by roughly a tenth, citing worse than expected outlook in its core UK and European markets in particular.

In July, the company said that it would take immediate action to align its fixed costs with the new, more bearish scenario to ensure funding for its growth plan.

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