Aston Martin Cash Burn Triggers Prospects for Debt Sale

2014-05-12 Read: 256x

Aston Martin’s development strategy is burning cash and prompting analysts from Barclays Plc to Societe Generale SA to put a “for sale” sign on debt of the British luxury sports-car maker.

The company is spending 500 million pounds ($848 million) developing fuel efficiency technologies and broadening its product range from two-door coupes such as the DB9, Vanquish and Vantage models to sport-utility vehicles. It’s aiming to double sales by 2016 with new cars and an expansion of its dealer network outside Europe.

Aston Martin, based in Gaydon, England, is the rare global luxury-automaker that doesn’t belong to a larger manufacturing group and its independence is a handicap compared with rivals, analysts said. Fiat SpA (F)’s Maserati and Volkswagen AG (VOW)’s Bentley are among supercar makers developing SUVs to expand in the U.S and emerging markets such as China and Russia, where there’s a growing class of wealthy consumers.

“Aston Martin is struggling to challenge sports car units of giant carmakers but lags competitors on performance, fuel efficiency, selling prices and operating margins,” Pierre Bergeron, a Paris-based analyst at Societe Generale, wrote in an April 29 note to investors in which he recommended selling the 304 million pounds of 9.25 percent bonds due 2018.

The yield on the bonds rose to 3.68 percent today from 1.71 percent last month, according to data compiled by Bloomberg.

‘Really Positive’

“We haven’t seen an impact on the bond and we’ve had a really positive response from the market on the plans for the future of the business,” said Jannette Green, global director of communications at Aston Martin in Gaydon.

Though the automaker’s sale in March of $165 million of 10.25 percent payment-in-kind notes due 2018 boosted the company’s liquidity, it also increased its debt, prompting Standard & Poor’s to cut the company’s credit rating last week by one level to B, five steps below investment grade. The PIK notes are rated two levels lower at CCC+.

Aston Martin will have negative free cash flow this year of 70 million pounds and a ratio of net debt to earnings before interest, tax, depreciation and amortization of 4.7 times, according to Barclays calculations. The company reported adjusted EBITDA for 2013 of 84.8 million pounds in a statement April 28.

London-based Barclays cut its recommendation on the company’s debt April 29 to “underweight” from “market weight.”

Credit Metrics

“Fundamental credit metrics of Aston Martin will weaken in 2014 despite rising EBITDA due to the high investment program and large interest expenses that will result in higher net debt,” said Christophe Boulanger, an analyst at Barclays in London. “Aston Martin will struggle this year and most likely next year as well.”

In January 2013, the company said it planned to invest 500 million pounds over the following four years. It sold 4,200 cars last year, 11 percent more than in 2012.

“We will, in the next few years, be implementing the biggest investment program in our 101-year history, preparing the ground for new and exciting products in the future,” Hanno Kirner, the company’s chief financial officer, said in the April 28 earnings statement.

The carmaker is backed by London-based Investindustrial, a European private-equity fund whose previous assets include high-end motorcycle maker Ducati, which Audi bought in 2012. Aston Martin said last year that Germany’s Daimler AG (DAI) will own as much as 5 percent of the company as part of a deeper agreement to share technology.

More Support

“They need more support than that,” said Boulanger. “They need to be bought by Daimler.”

Large carmakers can help niche manufacturers stay competitive by spreading development costs across brands and models. Bayerische Motoren Werke AG invested more than 1 billion euros ($1.39 billion) on making engines more efficient and developing electric vehicles. That sum exceeds Aston Martin’s revenue of 461 million pounds in 2012 and 519 million pounds in 2013.

Aston Martin vehicles have been featured in 11 James Bond movies, including the vintage silver DB5 in the latest one, “Skyfall.”

“They have a good brand image, so they will always have a buyer,” Boulanger said.

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