Debt Explained Covenant Analysis
Historical and Forward Looking Model
Reorg has produced a comprehensive financial and legal analysis of the deal and the company including forward liquidity projections and peer overview. To view the full analysis, click HERE.
U.K. luxury auto manufacturer Aston Martin's £840 million equivalent senior secured note offering comes amid severe cash burn due to the Covid-19 impact on volumes which has caused the topline to contract sharply in 2020 thus far in addition to negative working capital movements. Aston’s issuance, however, will be buoyed by several auto peers highlighting this week that volumes have recovered faster than expected in September. Continue reading for the Debt Explained team's analysis of Aston Martin, and request a trial to access thousands of other legal analyses.
The debt offering is part of a broader transaction in which the group is looking to refinance its entire capital structure due in 2022. The deal comes alongside a technology sharing agreement with Mercedes-Benz whereby it would receive various technologies in exchange for Mercedes taking a stake of up to 20% in the company.
Management says that the agreement with Mercedes will save Aston in costs and development capex which have exacerbated cash burn in recent years - as the company has failed to create high enough margins to reach cash generation.
The initial price talk on the note offering is at the high 8% to low 9% range and Moody’s has given the issue a Caa1 rating. The issue can be compared to McLaren’s senior secured CCC-rated 2022 notes yielding 11%. While the companies share similar operating models and end markets, there are significant differences between the credits of which investors should be aware.
EBITDA is negative on a last-12-months’ basis to Sept. 30, and the group carries high leverage at 6.3x even when applying a pre-Covid 2019 EBITDA. We assess that pro forma liquidity of £526 million is sufficient to fund short-term liabilities and allows room to invest in the business.
Management has released ambitious new targets for the company, which include wholesaling 10,000 units per year and generating £2 billion of annual revenue by 2025. This implies realizing an average selling price increase to near £200,000 per unit from about £150,000 at present, which the company said it believes will get it to adjusted EBITDA of £500 million. If it can successfully execute this plan, this would allow the company to cover £250 million to £300 million of capex requirements and around £100 million of estimated interest expenses.
Base case as presented below reflects a gradual ramp-up toward management's guidance. Although pro forma liquidity is sufficient, there is limited room for error and execution risk remains high
. Refer to our model and to our analysis for upside and downside cases and an overview of the company and the industry. We note that if further sensitivity as compared to our downside case is applied, underperformance eats into liquidity quickly.
Net debt and liquidity output of the model under three scenarios sensitizing volumes and average selling prices looks as follows with cash burn in all but the high case. Note that the graph below only shows select inputs and outputs, with the full model available for download HERE
In terms of comps, McLaren reports a superior average selling price and requires far less margin expansion to achieve free cash flow at normalized volumes of around 4,750 units. Aston Martin's leverage is also considerably higher than McLaren’s when using pre-Covid 2019 EBITDA.
Additionally, McLaren’s senior secured notes benefit from security over substantially all assets of the company, which includes the group’s headquarters and a significant collection of cars.
Meanwhile, the only significant hard asset underpinning the notes is the Gaydon facility. Management did not provide value when prompted by Reorg. However, Aston’s liquidity pro forma the deal will be stronger compared to McLaren, with execution risk tied to McLaren’s guided equity injection and refinancing.
We note that price talk for Aston’s notes was released along with the announcement of the deal, indicating investor pre-sounding and the likely expectation of existing creditors to roll into the new deal.
Aston Martin has reported considerably weaker EBITDA margins than peers McLaren and Ferrari, with EBITDA proving insufficient to cover its extensive capex requirements, which remain high relative to its peers and other auto manufacturers. Aston Martin’s net leverage stands out within the peer group, with net leverage at issuance around 27.4x.
For a comprehensive overview of key credit considerations and risks, click HERE