oIn the first half of 2020, U.K.-based luxury sports car manufacturer Aston Martin Lagonda (AML) raised £688 million in new equity (before fees).

oAs a result, its cash balance at the end of the second quarter of 2020 stood at £359 million, which was further increased in July 2020, when the group drew down $68 million of its delayed draw notes and received £20 million of support from the U.K. government through the Coronavirus Large Business Interruption Loan Scheme (CLBILS).

oWe no longer consider the company to be vulnerable to a liquidity crisis within the next six to 12 months as part of our base case. That said, we still forecast significant negative free operating cash flow (FOCF) of around £300 million for 2020, because we expect sales to decline, despite the launch of the new SUV, the DBX.

oWe are raising our issuer rating on AML and our issue ratings on its debt to 'CCC'. The recovery rating is unchanged at '4'.

oThe negative outlook indicates that the economic uncertainty caused by the COVID-19 pandemic still affects the group. It has subdued sales and production rates, as well as continued high cash burn. We could lower the rating if we consider a default inevitable within six months.

LONDON (S&P Global Ratings) Aug. 6, 2020-- S&P Global Ratings today took the rating actions listed above.

The rights issue and share placements of around £688 million provided AML with a much-needed boost to its liquidity position. As a result, the Yew Tree Consortium, largely controlled by Lawrence Stroll has taken a significant stake in the group. In addition, in July 2020, the group drew down about $68 million of its delayed draw notes and received £20 million of support from the U.K. government as part of the CLBILS. These actions supported AML's cash balance. We no longer consider the company vulnerable to an imminent liquidity crisis in the next six to 12 months, in our base case.

That said, we continue to forecast significant negative free operating cash flow of around £300 million in 2020. Economic conditions in AML's core markets remain tough, and it has to invest heavily in research and development (R&D) and maintain high capital expenditure (capex) to release its new models as planned. The DBX was launched in July 2020, and it expects to deliver the first Valkyrie in 2021 and unveil the Valhalla in 2022.

AML's capex stood at £162 million for the first half of 2020, and the company expects to invest a further £100 million through the remainder of the year. AML also experienced high working capital cash outflows of £86 million, largely due to an outflow of £110 million related to payables. As a result, AML reported a cash burn of around £270 million in the first half of 2020. As of June 30, 2020, AML reported gross financial debt of £1,121 million. Although liquidity is not an imminent concern any more, at least for the remainder of 2020, we still view AML's capital structure as unsustainable at this stage.

Including the DBX, we forecast that AML's 2020 sales volume will reach around 3,800 vehicles, down around 35% year-on-year, but will recover by around 30% in 2021, to closer to 5,000 vehicles. We also expect the group's average selling price of its sports cars will be lower in 2020 than in the previous year, as cars are sold at a discount to reduce the group's sports car inventory levels. The average selling price should show a slight increase in 2021, helped by the launch of new models. Overall, revenue is therefore expected to fall by 40%-45% compared with 2019, and to increase by about 35%-40% in 2021.

APAC sales, especially in China, were significantly affected in the first quarter of 2020, but all 18 dealers in China have now been open since mid-May. North American and European sales continued to decline through the second quarter, but all dealerships have now re-opened. AML has two manufacturing plants, Gaydon and St Athan. Of these, Gaydon remains closed as a result of the pandemic, which reduces current manufacturing capabilities, but the site is expected to re-open in August. The St Athan facility is open and producing the recently launched DBX model.

oHealth and safety

The negative outlook indicates that the economic uncertainty caused by the COVID-19 pandemic still affects the group. Sales and production rates are subdued and cash burn in the first half of 2020 has remained high.

We could lower the rating on AML if we were to expect a near-term liquidity crunch for the group, or if we consider a default inevitable within six months. This could be the case if the recovery in sales is slower than forecast, or there is higher than expected R&D or capex. It could also follow further material outflows in working capital. Although we do not expect this, in light of the recent strong shareholder support, we could also lower the rating if we were to expect a distressed exchange offer.

We could revise the outlook to stable if AML's revenue were to recover strongly in the second half of 2020, or if its cash burn were lower than forecast, such that its liquidity position stabilized. Any upside would likely require supportive macroeconomic conditions.

Related Criteria

oGeneral Criteria: Group Rating Methodology, July 1, 2019

oCriteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019

oCriteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016

oCriteria | Corporates | Recovery: Methodology: Jurisdiction Ranking Assessments, Jan. 20, 2016

oCriteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014

oCriteria | Corporates | Industrials: Key Credit Factors For The Auto And Commercial Vehicle Manufacturing Industry, Nov. 19, 2013

oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013

oCriteria | Corporates | General: Corporate Methodology, Nov. 19, 2013

oGeneral Criteria: Methodology: Industry Risk, Nov. 19, 2013

oGeneral Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012

oGeneral Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012

oGeneral Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009

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