British carmaker Aston Martin (AML.L) raised $150m (£121m) in an expensive bond sale today, to help it power through production of its first sports utility vehicle, the DBX, which is slated to begin delivering in the second quarter of 2020.
The high interest rate —12% — on some of the bond notes spooked investors, prompting shares to drop by more than 5%.
Aston Martin also said in a statement that an additional $100m of notes may be available next year if it hits sales targets with the new SUV. CEO Andy Palmer said in August that he expects annual sales of the DBX to come in about 4,000 units.
S&P Global Ratings downgraded Aston Martin Lagonda to 'CCC+' on the news, noting that “we believe that AML has reached a ceiling in terms of the amount of term debt and cash interest burden that it can sustainably service.”
S&P said that its negative outlook “reflects ongoing pressure on profitability, a high cash burn, and very high leverage in the face of heightened event risk associated with a potential no-deal Brexit and/or new tariffs on the vehicles it exports to the US.”
Russ Mould, investment director at AJ Bell, said in a note that the interest rates are “a major red flag that investors consider the car company to be a high-risk entity.”
While the global SUV market is booming, competition is mounting as most car brands are now betting on these big, expensive vehicles — not least to help them fund their transition to electric cars.
Aston’s new SUV could give the brand the kind of sales boost that the Urus SUV did at Lamborghini. However, the DBX, which will be built at the company’s St Athan plant in Wales, is going up against Porsche’s well-established Cayenne and, closer to home, the Bentley Bentayga and Rolls-Royce Cullinan.
Aston Martin floated on the London Stock Exchange in October last year, and its shares have lost nearly two-thirds of their value since then. It cut its 2019 sales forecast in July, down from about 7,300 units to maximum 6,500.
“Taking this debt on – short-term – is we think the correct tool to completely remove that thesis that we don’t have sufficient liquidity,” Palmer told Reuters.
“In every substantial and material way, this ensures that we can get through to DBX in spite of what all of those global uncertainties might throw at us.”