Aston Martin - The mist starts to lift.
All,
Please find our slightly altered analysis here.
Our intention is to take a long position in the SSNs, however, we will wait until the Q322 numbers are published and we can be confident that the smaller-than-expected debt buyback has translated to more cash on Aston Martin’s balance sheet as opposed to being consumed elsewhere in the business. Given currency gyrations and uncertain economic outlook, holding on to more cash rather than less is hardly something to criticise. Aston Martin could have used up to £320m to buy back debt, but in the end, only £184m flowed out. Post the rights issue our model has Aston Martin funded through the next three years.
SSNs will drift lower:
- Back in August, we chose to bide our time before investing. With the noise around the capital issuance and tender dissipating we see the SSNs being offered sub-par soon. The SSNs had been drifting towards par before the capital raising exercise began, and we expect a return to that trajectory.
- Our model has Aston Martin funded through the introduction of its new models and the maturity of the SSNs. We are now modelling cash of £440m on the balance sheet at year-end vs £290m previously due to lower debt retirement.
- However, in the short term there is a risk of disappointment lower cash on hand than expected: Aston Martin may still have its inventory bubble due to supply chain issues or there could be additional investment in R&D.
- We will hold off until the Q3 numbers are published at the end of October.
- Only $40m (3% of outstanding) of the SSNs were tendered.
2nd Lien holders keener to exit:
- In the context of a £630m capital raising and an expectation of £300m (our model) of cash available at FYE22, it is understandable that SSN holders felt more comfortable about staying put. The tender was skewed to the 2nd Lien.
- $144m (40% of outstanding bonds) 2nd Lien notes were tendered. Only $220m is still in issuance meaning liquidity will be limited.
Positioning:
- We are preparing to buy the SSNs, but having regard to the uncertainty surrounding AML in the last three years, we would rather pick up the bonds sub-par and see that opportunity as being at tend of October (next results). The transformational nature of the new GT/Sports model launches in 2023 carries execution risk and notwithstanding our expectation that Aston Martin has more cash than we previously modelled for, we want a return north of 10%.
- The 10.5% coupon reduces the duration on these notes promising a relatively solid basic earrings stream in otherwise uncertain times that we are ready to take on the books soon.
- Aston has a larger-than-expected cash balance to ease its way through any delay in working capital unwinds. Any drag on sales will be partly balanced against the positive impact of Sterling's weakness.
- The SSNs were heading back below par before the publication of the offering circular and we are inclined to bide our time on the expectation they return to that trajectory. At a 99c/$ we will be looking to start building a position for 5% of NAV.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055
www.sarria.co.uk