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Aston Martin Ratings Cut As It Borrows More To Fund DBX

Aston Martin DBX concept

Aston Martin Ratings Cut As It Borrows More To Fund DBX.

“If the DBX sells, earnings will motor. But investors should brace themselves. If the parachute fails to open fully, Aston Martin will crash to the bottom of the ravine”

Two agencies cut their ratings on luxury sportscar maker Aston Martin, raising the stakes for the success of its upcoming DBX SUV; if it bombs, so does the company.

S&P Global Ratings and Moody’s Investors Service cut their ratings after Aston Martin Lagonda borrowed $150 million at the hugely expensive rate of 12%, while adding another $100 million of borrowing to tide the company over as it launches the DBX. This second tranche will carry an eye-watering 15%.

The DBX, to be unveiled in December and launched early next year, will have to be some vehicle to compete in the high end of the SUV market which already includes the Bentley Bentayga, Rolls Royce Cullinan, Lamborghini Urus, and soon the Ferrari Purosangue. There is plenty of competition too from upstart “cheap” pretenders like the Range Rover Overfinch, Maserati Levante and high end versions of the Audi Q8, BMW X8 and Porsche Cayenne.

Prices for the DBX are expected to start at $180,000.

The Financial Times Lombard column said the high interest rates on the loans signal a company teetering on the edge.

“If the DBX sells well, then earnings will motor. But investors should brace themselves. If (using an analogy from a James Bond film starring a mythical Aston Martin) the parachute fails to open fully, Aston Martin will crash to the bottom of the ravine,” Lombard said.

S&P Global said Aston Martin has now reached the limit for debt that it could reasonably be expected to service.

DBX luxury SUV
“The negative outlook reflects ongoing pressure on profitability, a high cash burn, and very high leverage in the face of heightened event risk associated with a potential no-deal Brexit and/or new tariffs on the vehicles it exports to the U.S. In addition, AML is about to launch its new DBX luxury SUV, the success of which is critical to its ambitious growth strategy and ongoing creditworthiness,” S&P said in a statement.

In the first half of 2019 Aston Martin reported a 78.8 million pound ($97 million) loss, compared with a 20.8 million pound ($26 million) profit in the first half of last year. Aston Martin shares were floated at 19 pounds in October and are currently quoted at about 5.8 pounds. There was a profit warning in July, and it cut its production forecast for 2019 to between 6,200 and 6,500 vehicles from 7,100.

S&P Global said the downgrade reflected higher than expected cash burn in 2019. It expects negative free operating cash flow in 2019 of between 160 and 170 million pounds ($200 to $210 million).

“Although we expect a meaningful improvement of EBITDA in 2020, we believe that AML has reached the ceiling in terms of the amount of term debt and cash interest burden that it can sustainably service. In our base case, including the proposed new $150 million issuance, we forecast S&P-adjusted leverage of more than 30 times for fiscal 2019,” S&P said.

S&P said Aston Martin to access the 2nd loan will need to secure 1,400 firm orders for the DBX.

Enough liquidity
Moody’s said it cut its rating, but expected Aston Martin to have enough liquidity to fund the DBX.

“The negative outlook reflects the increased debt from the notes

issuance, which will result in continued very high leverage for at least

the next 24 months and delay de-leveraging further,” said Tobias Wagner, senior analyst at Moody’s.

“The continued high cash outflows for at least 2019 and 2020 also weigh on rating and outlook, but the new notes should provide the liquidity needed to see the company through the critical upcoming SUV DBX launch unless the company’s cash flow weakens from Moody’s current expectations,” Wagner said.

Investment researcher Jefferies said Aston Martin’s latest borrowing should “de-stress” liquidity and provide needed breathing room to execute the DBX launch.

Private equity firm Investindustrial owns 34% of Aston Martin, while Mercedes-Benz parent Daimler has a 4% stake. Mercedes makes some Aston Martin engines.


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