Aston Martin Lagonda is rolling the dice on its new SUV … a major gamble that must succeed.
According to The Guardian, the luxury carmaker has been forced to pay a hefty interest rate to borrow US$150 million (£120 million) as sales fall and it struggles to meet targets.
The bad news: They will pay a relatively steep 12% on the secured bonds until April 2022.
If it receives 1,400 orders for its new DBX model within nine months of the US$150 million, Aston Martin has the option to issue a further US$100 million of secured bonds paying the same rate.
However, it could have to pay an even more punishing 15% if orders fall short.
Not good territory for a legendary carmaker associated with the films of British superspy James Bond.
Russ Mould, the investment director at the stockbroker AJ Bell, said the high interest rates were a major red flag that investors considered the car company to be a high-risk entity.
He said the 12% rate suggested Aston Martin needed the money and had been forced to bow to investors’ demands, The Guardian reported.
Part of the debt is structured as a payment-in-kind note, which means the interest is not paid regularly but rolled up and paid at maturity. Overall, payments at the end of the term are higher.
“History tells us that companies with high debt repayment obligations, particularly those involving PIK notes, can get into real trouble in a market downturn if earnings are hit and they struggle to service the debt,” Mould said.
Aston Martin said it needed the funds to carry out a plan to produce seven new models in as many years. The carmaker will also use the money to pay off short-term debts and cover transaction costs.
Standard & Poor’s, a debt-rating agency, cut its rating on Aston Martin deeper into non-investment, or “junk,” territory after the bond issue. S&P downgraded Aston Martin to CCC+ from B- with a negative outlook, saying it had reached the limit of debt and interest it could repay.
S&P said the negative outlook reflected the company’s high debt and spending as it faced the risks of a no-deal Brexit and new tariffs on US exports. “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,” the agency said.
The “second century” plan launched by Aston Martin’s chief executive, Andy Palmer, has struggled to get out of first gear, The Guardian reported.
The company has faced rising costs, supply chain issues and a sales slump. It reported a £79 million loss in the six months to the end of June, compared with a £21 million profit in the same period a year earlier.
Aston Martin has blamed economic uncertainty and the prospect of a no-deal Brexit for poor sales in the UK and Europe. The carmaker’s market value has plunged from £4.3 billion, when it floated on the stock exchange last October, to about £1.2 billion as concerns about its losses have mounted.
Aston Martin said the DBX, its first sports utility vehicle, was on schedule and had been “well received” at Monterey car week in August.
According to sources, the DBX will be unveiled without the camouflage livery used to disguise the looks of new cars in December and be on the road toward the end of the second quarter.