007? More Like 00Debt: Aston Martin Lagonda forced to raise further capital
July 14, 2020
3 min read
What's going on here?
Aston Martin, whose cars are ubiquitous with James Bond films, has raised £152m through the issuance of new shares and £52m with a high-interest loan (12%).
What does this mean?
The closure of Aston Martin’s factories and dealerships as a result of the COVID-19 pandemic has led to a Q1 loss of £119m and even lower projected Q2 sales, which adds to the already struggling company’s headache.
Since its IPO in October 2018, Aston Martin’s share price has fallen 92%. This could be a consequence of global trade tensions which added to fears of a global growth slowdown, or Brexit uncertainty which deterred foreign investment. Or it could be something worse, such as Aston Martin’s failure to adapt in the UK car production sector which contracted 14% in 2019.
While Aston Martin paused work on its first all-electric car (release now expected after 2025) competitors like Hyundai and Kia have been investing heavily into the sector (UK electric vehicle start-up Arrival received €100m). In the luxury bracket, Tesla’s share price has risen by 235% since March 2020. This is worrying for Aston Martin as it risks falling behind, especially considering the UK government’s ban on new petrol and diesel cars from 2035.
What's the big picture effect?
Aston Martin might not have a License to Kill, but it does have one to borrow, with its debt now in excess of £883m. Debt finance involves an investor buying debt instruments from a company and in return, receiving repayments on the loan plus interest. The problem with debt financing is that it represents a fixed expense which, if unpaid, gives lenders the power to apply to have the company wound up. Aston Martin’s highly leveraged position translates to a risk for investors especially with the debt money going towards operational costs rather than new revenue streams. This is why Aston Martin’s most recent loan was under a “payment in kind” system, requiring half of the repayment in cash and the other half in shares.
Debt finance is generally preferable for companies that are hesitant to give investors a stake in their business, whereas companies seeking long-term investment would opt for equity financing (think Dragons’ Den). Equity finance involves raising capital through the sale of the company’s shares. This can have the negative effects of diluting existing shareholders’ profits, with dividends being spread across a larger pool of investors; and reducing shareholders’ powers, with new investors potentially gaining voting control. This could explain why Aston Martin’s shares fell by 20% after it announced its £152m share issuance.
Before the pandemic, Aston Martin had hoped that its new manufacturing facility in South Wales (which created 750 new jobs) would help the company turn over a new leaf. The plans for this to increase profitability likely make debt finance preferable, as investors would not be entitled to any of the profits, unlike with equity finance where investors could receive dividends or sell their shares for an increased price. However, as Aston Martin’s strategy juxtaposes that of other car manufacturers (such as Jaguar Land Rover which cut 10% of its workforce as part of wider cost-cutting measures), it is no surprise that Aston Martin has been losing investor confidence. One recent example of this was Aston Martin’s second biggest investor, Italian private equity firm Investindustrial, recently reducing its stake from 19.92% to 14.99%. Of course, COVID-19 has complicated matters, forcing Aston Martin to make 500 redundancies.
Although Aston Martin will benefit from a marketing boost with three of its cars featuring in the latest James Bond film, as this not being the company’s first attempts to raise capital (to read about its £500m rescue deal earlier in the year year, click here) critics worry that without a substantial strategic overhaul, Aston Martin could find itself going into administration for the eighth time.
Report written by Keir Galloway Throssell
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