Aston Martin – Options opening
All,
Please find our unchanged analysis here.
Aston Martin (AML) has decided to deal with the high-cost Second Lien debt by issuing equity. Given the current cost of equity, this is not an unreasonable proposition. Leverage will fall, and refinancing the rest of the capital structure will be simplified. AML has announced that the Second Lien notes will be called in November. We expect the remainder of the capital structure will be refinanced in November 2024. Improving results and successful vehicle launches are opening refinancing options for AML.
Investment Rationale:
In June, we took a long position for 5% in AML 2nd Lien and SSNs. We invested 3% of NAV in the 2nd Lien at 108 and 2% in SSNs at 101.
- Post the recent equity issue, the 2nd Lien position will now be repaid in Nov-23 at a call price of 108. The return for our six-month hold will be 7.4% (15.3% annualised). We expect the SSNs will be refinanced in Nov-24, giving us a 9% return.
- We have liked AML before, as we are convinced that the brand name itself is worth more than the debt on it, and we are comfortable that AML can remain relevant through the transition to electric.
- The risk of significant cash outflows on AML developing its electric engine development was a concern for us. We are happy that AML has now opted for bought-in technology.
- AML has launched one of its six new models, and the reception has been positive. The execution risk has lowered but not disappeared.
- Last year’s rights issue leaves AML funded through to becoming free cash flow positive.
Taking out the 2nd Lien makes sense now:
- AML’s cost of equity is around 13% vs 15% for the 2nd Lien. If the cash was available then why not take it?
- Headline leverage will fall by 0.75x based on our 2023 EBITDA forecast of £234m. It will help in getting AML to its 1x leverage target. Pro-Forma the refinance, FY23 leverage on our model falls to 2.8x from 3.6x.
A broader refinance coming in 2024:
- We forecast a refinance of the capital structure in late 2024. Our EBITDA forecast for FY2024 is £314m with leverage in the 2.5x area.
- Given a medium-term target of 1x leverage, AML may want to add some easily repayable secured bank debt into the capital structure as part of the refinance. A mixture of $ and £ notes may also be feasible, reducing the FX drag.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055