March 31, 2017 / 2:18 PM / 4 months ago

Aston Martin regains licence to print bonds

5 Min Read

* James Bond carmaker wins over bond investors

* Pitches turnaround story based on new models

* Adjustments to earnings numbers in focus

By Robert Smith

LONDON, March 31 (IFR) - Aston Martin is set to successfully raise public debt for the first time in five years, winning over yield-hungry investors with a turnaround plan that promises to turn its cashflow positive.

The UK carmaker, famous for its connection to the James Bond film franchise, has pitched to bond buyers that its recent launch of its first new model in years will dramatically bolster earnings - guiding for £160-£165m of Ebitda this year, up from £101m last year and just £61m in 2015.

And a strong reception has set the company up to price a £550m-equivalent five-year non-call two senior secured bond later on Friday, having upped the size of the B3/B- rated deal by £20m on the back of demand.

A US$400m tranche will price at 6.50% yield and a £230m piece is at 5.75%, tighter than earlier price indications from the deal's global coordinators JP Morgan, Deutsche Bank and Goldman Sachs.

"They're selling the dream and people are buying it," said one banker. "It's a fundamentally interesting brand with a very capable management team, so there's definitely upside. But they've guided some pretty big numbers, and if they don't hit, there's even more potential downside."

Aston Martin's bonds are attractive to investors starved of higher yielding debt, particularly in Europe, where the strength of demand for leveraged loans has dramatically dented Single B rated bond supply.

But for the company it represents a big step down in interest costs, given that it is refinancing high-coupon legacy debt - a £304m 9.25% 2018 senior secured note and a privately placed US$165m 10.25% 2018 PIK note at a holding company.

PIK toggle notes allow companies to make interest payments with additional debt if they are short of cash, meaning the size of the debt can balloon if not tackled quickly.

Turnaround Time

The carmaker has had a chequered history in the bond market, with financial distress at its former principal owner, Kuwaiti fund The Investment Dar (TID), sparking liquidity concerns.

The senior secured bonds it is refinancing see-sawed in the secondary market in the months after they were issued in June 2011. Just six months later, in December 2011, they plummeted to a cash price of 61, following weak results and downgrades by both Moody’s and S&P.

Italian private equity firm InvestIndustrial purchased a 37.7% stake the following year, and new investment has allowed Aston Martin to launch its first new sports car models in years - delivering the new DB11 in the final quarter of 2016.

"The problem these guys used to have was that their shareholders didn't have any capital to invest in the business and new model introduction slowed to a crawl," said a second banker, who was close to the deal. "That's over now."

InvestIndustrial also has further incentive to make sure its new product line delivers, as its owns 75% of Aston Martin's preference shares. These shares have warrants attached and rights to accruing preferential dividends.

And Daimler owns a 4.92% non-voting stake in the company, that accompanies the German carmaker's agreement to provide electrical systems for Aston Martin's cars.

Significant Adjustments to Earnings

While the new bond deal saw a strong reception from investors, some flagged its extensive use of adjusted numbers to calculate its key financial metrics.

While Aston Martin posted £101m Ebitda last year, the company has used the £115m Ebitda reported in the last 12 months to February as the bond's base number. This is unusual, as February is not the final month in a quarterly reporting period, so the earnings for the first two months this year have not been independently audited.

On top of this, Aston Martin then made pro forma adjustments to take this figure up to £161m, by predicting the Ebitda it expects to realise from car orders that are in production. On this basis, the company will have 2.5x net debt to Ebitda, a rather more flattering multiple than the 4x net leverage from 2016's £101m earnings number.

"The pro forma is very pro forma and could look a bit iffy, but I do understand why they are doing it," said one investor. "Full-year guidance was £160-£165m, so if you don't believe they can do that, you shouldn't buy the deal anyway."

The banker close to the deal said that management also guided investors that the company will become free cashflow positive next year, as its capex spend "will peak this year".

The investor said that even at 2.5x, however, leverage was still too high to be sustainable in the long term for "any car company".

"Ultimately, they have enough gearing in the business to not need more on top," he said. "You can argue that luxury carmakers command very high valuations, so it makes sense to have some leverage. But Aston Martin is still on the wrong side of that." (Reporting by Robert Smith; Editing by Alex Chambers and Philip Wright)

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