Aston Martin White Knight Will Only Fund Months of Running Cost

(Bloomberg) --

Relief for Aston Martin Lagonda Global Holdings Plc from a potential 200 million pounds ($260 million) of rescue money may only prove temporary unless the company finds a permanent fix to its cash burn.

News on Friday that the troubled luxury carmaker is in advanced talks with billionaire Lawrence Stroll and China’s Geely Group to inject new funding triggered the biggest rally in its sterling bonds since April 2017, according to data compiled by Bloomberg. Stocks also soared 15%.

That reaction may be premature. The potential 200 million pounds in new cash represents little more than half a year of capital expenditure -- it spent about 162 million pounds in the first half of 2019, according to an earnings statement.

“It buys them time and helps management focus on improving execution rather than balance sheet issues,” said Olivier Monnoyeur, a portfolio manager at BNP Paribas Asset Management.

Aston Martin warned last week its earnings will fall short of earlier forecasts following what Chief Executive Officer Andy Palmer called a “very disappointing year” in 2019. Flagging operational performance has underscored the need for new funds to finance the costs of running the firm and much depends on the success of a new SUV.

The $189,000 DBX model is at the heart of Aston Martin’s turnaround plans, which include more than doubling annual output to 14,000 autos by 2023. Aston Martin has received 1,800 orders for the model, meeting a condition for the carmaker to obtain a follow-on loan for $100 million.

The company is planning to issue new bonds. Under the terms of its debt, the new securities will need to be issued at a pricey 15% coupon, which would bring its total debt above 1 billion pounds.

While the debt load is considerable -- between 6.9 and 7.6 times earnings, according to its trading statement last week -- debt is not due for repayment until 2022.

“Aston needs a liquidity boost,” said Brian Studioso, an analyst at CreditSights. “While Aston has received sufficient DBX orders to draw up to $100m in delayed draw notes, an equity investment by Stroll and or Geely would further enhance the company’s financial flexibility and ability to see the DBX launch through to reap the incremental cash flows from the new SUV.”

Talks with potential rescuers allude to a capital raise. The company however, has found its ability to harness equity capital hindered by a restriction on management’s power to issue stock of up to 5% of its equity without shareholder approval, Bloomberg reported in November.

“If you look at the state of the share price, if you just do a rights issue you’re going to have a massive amount of dilution so you need to come up with something a bit more creative,” said Philippe Houchois, equity analyst at Jefferies.

For bondholders, a proposed injection via equity raises some questions.

“Debt holders will want to know if there is a discount on the new equity and what this implies for valuations, should the deal fail given high leverage”, said George Flynn, a managing director at Everest Research.

--With assistance from Siddharth Philip and Charlotte Ryan.

To contact the reporters on this story: Laura Benitez in London at lbenitez1@bloomberg.net;Irene García Pérez in London at igarciaperez@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Chris Vellacott, Luca Casiraghi

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