Fast and furious pile-up of debts threaten UK's luxury carmakers
British luxury carmakers’ bonds have tumbled amid sluggish sales and the prospect of a brutal global recession, just as the heavily-indebted companies mull raising more cash to cope with the Covid-19 pandemic.
McLaren Group Ltd.’s notes have fallen to a record low after the carmaker was forced to halt production and this year’s Formula 1 racing series was postponed. Debt of Aston Martin Lagonda Global Holdings Plc and Jaguar Land Rover Plc are also languishing below face value, according to data compiled by Bloomberg.
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These companies may well need to get debt investors on side as they require more cash to battle the impact of the pandemic. McLaren is seeking up to 300 million pounds ($367 million) of financing while Aston Martin has said it may raise more funds just months after securing a cash injection from its new billionaire owner Lawrence Stroll.
“Many of these companies were already burning through cash before this crisis," said Uli Gerhard, a senior portfolio manager at Insight Investment Management Ltd. “More debt won’t solve the problem. If equity is not there, they’ll have to repair their balance sheets."
A spokesman for McLaren Group said the firm is exploring “a variety of different funding options to help navigate these short-term business interruptions."
An Aston Martin spokesman said the company is exploring additional funding and re-financing options to increase liquidity, as it’s prudent given “ongoing uncertainties."
Representatives for Jaguar Land Rover, owned by India’s Tata Motors Ltd., didn’t reply to a request for comment on the company’s debt pile and whether it plans to raise more funds.
While these junk borrowers don’t have immediate debt maturities, the prospect of mounting losses adds further pressure to their already levered balance sheets, according to Joel Levington, director of fixed income research at Bloomberg Intelligence.
“A business shock of just a few weeks has created chaos in the sector," he said. These carmakers “simply don’t have the product breadth, geographic reach or financial flexibility to withstand this crisis as other mass carmakers do."
U.K. car sales have been hit hard by the pandemic with new registrations falling 97% in April to a level not seen since just after World War II. Even as some factories start to reopen, there are questions about what demand will look like for luxury vehicles as the world’s economy shrinks.
Supercar maker and racing team owner McLaren requires new funding just months after completing a similar-size capital raise in March. The new borrowing could take the form of debt secured against the value of its Surrey headquarters and car collections, Sky News reported last week.
The company is also negotiating breathing room on debt tests with its banks as liquidity deteriorates, management told investors last month. S&P Global Ratings and Moody’s Investors Service have downgraded McLaren’s rating to eight levels below investment grade.
Aston Martin reported a wider first-quarter loss and a 60% slump in revenue last week. The pandemic has dealt a fresh blow to the comeback plan outlined by Canadian billionaire Stroll. Aston Martin has already warned it may need more funds just months after Stroll provided a 536 million-pound cash injection.
The company’s Chief Executive Officer Andy Palmer said last week that deliveries of the firm’s game-changing SUV model DBX are on track to begin in summer, but that it still needs to invest in new products to come out of the coronavirus crisis in a position of strength.
That’s a common problem. In many cases new models and electric vehicles are crucial for these companies and months of depressed sales risks jeopardizing those plans.
“It’s a fine balance between spending what they can spend without damaging their financial profile too much," said Ilana Elbim, a senior credit analyst at Federated Hermes.
Jaguar Land Rover was forced to keep it factories closed for almost two months before reopening this week, damaging sales. S&P and Fitch have downgraded the company to B, five levels below investment grade.
For Gerhard at Insight, all three companies face a grim outlook as consumers curtail spending on big ticket items.
“This crisis is likely to make everyone poorer and more cautious," he said.