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July 30, 2019

Moody’s downgrades Aston Martin Lagonda though outlook stable

Moody's Investors Service has downgraded Aston Martin Lagonda Global Holdings' corporate family rating (CFR) to B3 from B2 and its probability of default rating (PDR) to B3-PD from B2-PD.

By Olly Wehring

Moody's Investors Service has downgraded Aston Martin Lagonda Global Holdings' corporate family rating (CFR) to B3 from B2 and its probability of default rating (PDR) to B3-PD from B2-PD.

Concurrently, Moody's has also downgraded the instrument ratings on the existing senior secured bonds issued by Aston Martin Capital Holdings to B3 from B2. The outlook on both entities remains stable.

"The downgrade of Aston Martin Lagonda's ratings reflects the lack of progress in terms of volume growth and profitability for 2019, following the company's trading statement, and hence continued high negative free cash flow and high leverage", said Tobias Wagner, senior analyst at Moody's.

"AML's weaker performance in 2019 raises the stakes for a successful execution of the upcoming SUV DBX launch. Also given the ongoing weak and competitive market environment, Moody's now considers it unlikely that leverage and free cash flow will be in line with a B2 rating by 2020."

The downgrades followed AML's release of a trading statement on 24 July 2019, highlighting a weak second quarter 2019 performance and meaningfully revising down its guidance for volume growth and profitability in 2019. The company also mentioned that it is anticipating that the weakness will continue for the remainder of the year and that it is planning prudently for 2020. Given the lack of progress in growing volumes, improving profitability and cash flows in 2019 and given greater execution risks to AML's growth plans into 2020 and beyond, Moody's expects Moody's-adjusted debt/EBITDA and free cash flow for at least 2019 and 2020 to be more commensurate with a B3 rating.

Aston Martin Lagonda's 2019 guidance revisions include wholesale volumes (-11% mid-point), now expected at around similar levels to 2018, a company-adjusted EBITDA margin of 20% instead of 24% and a slightly revised capex and R&D expectation of GBP300m instead of GBP320-340m for the year. While the company also highlighted that it remains on track regarding important launches and drivers of volume growth over the next 12-18 months, such as its first SUV DBX or the high-end Aston Martin Valkyrie, the significant changes to wholesale volume expectations and efforts to manage inventory ahead of those launches alongside a weak and competitive market environment, raise the execution risks for the significant planned step up in performance in 2020.

Moody's considers the company's liquidity profile currently as adequate but the company's large negative free cash flow (after capex, interest) for 2019 and likely continued negative free cash flow in 2020 mean cash balances will fall fast from current levels. As of March 2019 and pro-forma for the US$190m notes issuance in April 2019, the company carried GBP280m of cash. The committed GBP80m revolving credit facility due January 2022 is essentially fully drawn. As of December 2018, the company had GBP29m of short-term debt (aside from the revolver) and the next larger maturity would be the notes in April 2022. Given the continued need to invest into its future model line-up and lack of growth, the company's liquidity profile has weakened in Moody's view.

The stable outlook reflects Moody's expectation that despite the weakened performance in 2019, the company will return to visible growth in 2020 on the back of the SUV DBX launch and its currently adequate liquidity profile. Moody's noted the rating and outlook do not incorporate the impact of a potential "no-deal Brexit" or future trade barriers such as tariffs, which could lead to negative implications for outlook or rating.

Successful execution of the DBX launch alongside visible growth in scale, profitability and free cash flow improvements would create upward pressure on the rating. This would include Moody's-adjusted debt/EBITDA improving to below 6.0x on a sustained basis, Moody's-adjusted EBITA margin above 7% on a sustainable basis and Moody's-adjusted FCF/debt becoming positive. Conversely, negative pressure on the rating could come from a lack of sufficient volume and profitability improvements, for example from weaker than expected DBX sales, and a resulting ongoing negative free cash flow and high leverage levels. A significant deterioration in Aston Martin's liquidity profile shown in very little to no headroom to cover cash needs over a period of at least 12 months would also pressure the ratings.

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