By Corey Sullivan (University of Queensland), Dhruva Nistane (Wharton School of the University of Pennsylvania), Callum Magee (University of Glasgow), Chirag Gupta (New York University Stern School of Business)
Overview of the Deal
Aston Martin, the British carmaker best known for its DB and Vantage models as well as its frequent cameos in the Bond films, has raised £260m in a share sale and high-interest debt. The automotive company had been facing underlying financial struggles far before the outbreak of COVID-19. In 2019, despite industry tailwinds and a healthy global economy, Aston Martin’s losses increased to more than £100m, eventually necessitating a rescue by a consortium of investors, who claimed a 16.7% stake in the company in return for a direct investment of £182m.
Like with most other automotive companies, COVID-19 brought Aston Martin’s operations to a near standstill. In order to bolster its cash reserves and facilitate the production of the Aston Martin DBX, the company’s first SUV, Aston Martin sold shares equivalent to 20% of its market value in a deal that raised about £190 million and drew down on £54m in debt at a 12% coupon. The interest on the debt will be paid half in cash and half in shares under a payment in kind system.
Macroeconomic Trends
Like most other carmakers, Aston Martin has been hit hard by the COVID-19 pandemic, as demonstrated by the 97% plunge in British new car sales in April. In March, the company suspended production at its two factories and a vast majority of its dealerships were forcefully shut down, leading to a pile-up of unsold showroom stock. The increase in inventory, coupled with a breakdown in the company’s supply chain, caused a near standstill in the company’s operations. This standstill could not have come at a worse time, as Aston Martin had been preparing for the launch of the DBX, the company's first SUV. The DBX is particularly aimed at the high-end Chinese market, where Aston Martin’s sales rose by 28% in 2019 and recent luxury SUV offerings have found traction. However, the pandemic may write a different story with a 3.9% first-quarter decrease in Chinese disposable income.
While Aston Martin has reopened its factories and begun production of the DBX, COVID-19 is not the only macroeconomic obstacle to Aston Martin’s success. The company had been struggling long before the pandemic hit, seeing as its shares have fallen to 51.6 pence since having floated at £19 in October 2018. Along with the consequences of the pandemic, it will continue to face a slowing European market and a potential long-term economic downturn.
Company Overview
Aston Martin is a British manufacturer of luxury sports cars and grand tourers. The company has over 150 car dealerships in over 50 countries and is traded on the London Stock Exchange. They primarily manufacture automobiles through three sites across the UK. Aston Martin has become a global luxury brand by branching out into projects including speed boats, bicycles, clothing, submarines, and aircraft.
Founded in: 1913
Headquartered in: Gaydon, United Kingdom
CEO: Tobias Moers
Number of Employees: 2,450
Market Cap: $877.42m
EV: $2.09bn
LTM Revenue: $1.104bn
LTM EBITDA: $-43.54m
LTM EV/Revenue: 1.89x
LTM EV/EBITDA: -47.95x
Debt Asset Ratio: 0.48x
Table: Current Capital Structure (CapitalIQ)
Bond Details of Aston Martin
Table: Credit Ratings of Aston Martin (CapitalIQ)
The struggle that Aston Martin finds itself in is representative in their credit ratings, given that the past three bond issuances have all been rated CCC- by the S&P, which is considered high risk - “junk” rated debt.
Table: Bond Structure of Aston Martin (Cbonds)
Projections and Assumptions
Why was this deal done?
As aforementioned, Aston Martin was struggling before the pandemic. Initially, at the time of their IPO in 2018, the company had a trading price of £19, but share prices dropped 98.5% to an LTM low of 27.50p per share. Recent depressed public investment and low revenue streams have inflated their net debt to £1.027bn, forcing them to raise an emergency £563m in April (including a £171m stake from new Chairman Lawrence Stroll), a £20m UK Government loan and £260m July Debt/Equity issuance. Due to COVID-19 negatively impacting consumer confidence and universal lockdowns resulting in travel restrictions, demand for Aston Martin’s vehicles plummeted, with core wholesales volumes down 44%. Total and core wholesale average selling prices of Aston Martin’s vehicles fell 38.75% to £98,000 from £160,000 in 2019, significantly hurting margins.
With slashed average prices, clogged up dealerships and two factory closures, Aston Martin has faced significant cash burn, resulting in a £120m loss in Q1 2020, and with ten of Aston Martin's latest debt issues all expiring on April-15-2022, a £260m Debt/Equity issuance seems like a sensible move.
Short-term Analysis
Aston Martin is no stranger to bankruptcy — it went bankrupt seven times before it listed its stock on the LSE. It was on the brink of bankruptcy before Lawrence Stroll led its bailout and refinancing in January 2020. Despite multiple cash injections, Aston Martin is far from safe. The fact that the company had to draw down on debt at a 12% coupon is a clear sign of its desperation. Thus, a great deal of Aston Martin’s short-term future rests on the shoulders of the DBX, its high-end SUV that will compete with the likes of the Lamborghini Urus and the Bentley Bentayga. The model, having been under development for the last five years, just started production with the first DBX rolling off the assembly line this week.
Long-term Analysis
COVID-19 may accelerate the pace at which drivers transition towards more carbon-efficient vehicles. In turn, Aston Martin has unveiled their new £2.5m hybrid hypercar, the Valkyrie, which comes with a 6.5-litre V12 engine. Starkly different from a traditional hybrid system, the V12 is torque-enhanced during take-off and uses the electric motor for a power boost, using less fuel and is more environmentally friendly. The Valkyrie, Valhalla and Rapide E are all new electric and hybrid vehicles that Aston Martin has brought out or is in the pipeline for production. This shift to electric and hybrid production reflects the core component of Aston Martin’s wider business strategy of environmental sustainability by operating and maintaining a supply chain and environmental system in line with ISO 14001:2015. However, Aston Martin has delayed all plans for electric vehicles including the Rapide E, which is under review, and the Lagonda by three years to 2025, after accepting an emergency investment from new Chairman Lawrence Stroll.
Nevertheless, Aston Martin’s recent shift in production may improve long-term sales with their models as it fits with a wider trend towards cleaner methods of travel. However, with current cash burn and weak consumer spending, this pickup in sales may only appear after escaping the depths of the current recession once consumer confidence picks up.
Aston Martin has recently secured £20m from the Government’s coronavirus large business interruption loan scheme (CBILS) to keep it on track during the ongoing pandemic. This, coupled with ten of Aston Martin's latest debt issues, which all expire on April-15-2022, has leveraged Aston Martin's Long-Term Debt to £1.027bn, a 22.4% increase from the previous quarter. This has led to a series of cost-saving measures implemented by new Chairman Lawrence Stroll, including plans to cut up to 500 manufacturing jobs as part of a major restructuring plan and only selling cars that have been paid for by customers instead of bulking up showrooms. Aston Martin’s cash reserving strategy could deflate their current debt levels, but lower showroom sales could hinder revenue streams.
Financial Ratio Analysis
Table: Aston Martin’s Ratios (CapitalIQ)
Aston Martin's Return on Capital is -3.1% for the last twelve months, demonstrating their ineffective use of cash despite a change in leadership and multiple capital injections
Aston Martin’s debt to equity ratio has increased from 207.8% to 283.3% over the past 5 years, threatening the company’s long term solvency
Aston Martin’s EBIT/Interest Expense has fallen from 1.4x to 0.1x over the last 2 years, a consequence of their high-interest rates, recent debt issuances, and decreases in EBIT
Risks and Uncertainties
The global economic slowdown is affecting demand for Aston Martin’s products, especially halting their growth prospects in the Asia-Pacific and Middle-East regions. Additionally, COVID-19 is reducing Aston Martin's global growth rate as the market shocks are forcing a decline in consumer spending and decreasing the disposable income of consumers. Consequently, the demand for Aston Martin’s products is lowering and suppliers are unable to meet their commitments given the social distancing and monetary constraints disrupting their supply chain.
Legally, the recent ban in the UK on the manufacture of petrol, diesel, and hybrid cars starting in 2035 will affect Aston Martin’s sales significantly. Aston Martin would need to tailor its manufacturing to electric cars in order to continue growing and avoid the risk of non-compliance, resulting in a remodelling of their current cash-saving strategy. Additionally, tax rates in the UK have been fluctuating in the last couple months, particularly due to Brexit, resulting in higher tariffs when exporting to the US, higher prices, and declining demand.
The company has been struggling to maintain working capital requirements, evident from their past bankruptcies and distressed capital structure, which indicate a weakening core profile. Moreover, Aston Martin is heavily relying on the sale of DBX models to improve their yearly earnings. Aston Martin's current financial condition is weakening and the economic and social market shocks in this globally weakening economy might restrict their ability to turn the bottom line positive.
“Further steps [will be taken] to improve financial flexibility in a period of ongoing uncertainty with this additional funding to execute the business plan”
Lawrence Stroll, CEO
Table: Aston Martin's Earnings Per Geographic Segment
Will they be able to repay?
Given the worsening solvency ratios and volatile market conditions, Aston Martin needs to work on improving their turnovers and efficiency. Notably, Aston Martin’s bonds mature in 2022 which might cause issues with repayment. Aston Martin has been increasing its capital expenditure and has been trying to repay its previous debt obligations. Significant leverage levels may restrict the company’s ability to repay the indebtedness. However, the company's cash reserves have been increasing throughout Q1 2020, which might signal an optimistic environment and stimulate creditworthiness in the eyes of creditors.