Aston Martin - Two Questions Remain - Model Update

All,

Please find our updated analysis on Aston Martin here.
The recent refinancing has removed Aston Martin's immediate liquidity risk, but it has also fundamentally changed the credit story. The Company now has sufficient liquidity to execute its product plan over the next 18–24 months, yet our model still indicates a further funding requirement before the 2029 bond maturities. More importantly, the NewCo financing has exposed weaker creditor protections than we had previously assumed, leaving bondholders facing two key questions: can Aston Martin generate sufficient cash to grow into its capital structure, and if not, how will the next round of funding be raised?

Investment Considerations:
- Despite the recent weakness in Aston Martin's bonds, we are not taking a position at current levels. While there are differing views across the desk on valuation, we are aligned on one key point: the Company is likely to require additional funding well before the 2029 bond maturities, limiting the attractiveness of the current risk/reward.
- Before the announcement of the NewCo financing, we had modelled a funding requirement of approximately £300m. We had also assumed that any new capital would likely be structured as a super senior facility given the Company's liquidity profile. However, our base case was that the existing bond documentation was sufficiently restrictive to require bondholder consent before such a structure could be implemented. We were wrong on this point. The ability to introduce structurally senior debt without bondholder approval is a materially weaker outcome for existing creditors than we had anticipated.
- That said, we do not believe this development entirely explains the subsequent 20–30 point decline in the bonds. The need for additional capital was never in doubt. The refinancing addresses a near-term liquidity issue rather than creating one. In our view, the market reaction reflects both the unexpected structural subordination and a reassessment of recovery values under future financing scenarios.
- Our analysis continues to indicate that further capital will be required. Even after the recent refinancing, we estimate Aston Martin will require at least a further £150–200m of funding before reaching a self-sustaining free cash flow position, with downside risk to this estimate should operating performance disappoint or the product rollout be delayed. As a result, we see limited upside for the existing bonds unless bondholders are successful in challenging the NewCo financing or management identifies an alternative source of capital that is less dilutive to existing creditors.
- Equally, we do not expect the bonds to continue falling materially from current levels. The refinancing has secured liquidity for the next 18 months, removing immediate default risk and providing management with sufficient runway to launch Valhalla and continue its product strategy. Assuming no significant deterioration in trading, we expect the Company to continue servicing its debt over the next 18–24 months, derisking any entry point by 15-20pts. At current prices, investors therefore stand to receive a meaningful portion of their expected return through coupon payments alone, providing some support for bond valuations around current levels.
- The longer-term investment case ultimately depends on the Company's ownership structure. We continue to believe Aston Martin is unlikely to remain independent indefinitely. In our view, the most probable strategic outcome is an acquisition by Geely, which already owns an equity stake, has a long-term track record of investing in premium automotive brands, and would be well positioned to provide the operational and financial support Aston Martin requires. However, the timing, structure and implications for bondholders remain highly uncertain, making it difficult to underwrite this outcome as part of today's investment case.
- Overall, we believe the recent refinancing has removed the immediate liquidity overhang but has also demonstrated that existing bondholders are more vulnerable to structural subordination than previously assumed. While valuations have become more compelling following the sell-off, we do not yet see a sufficiently attractive asymmetric opportunity to justify taking a position.

NewCo Financing:
- The Senior Secured Notes fell c.25pts following the refinancing announcement, which appeared excessive relative to the underlying funding requirement. Our model, and those of other investors, had already identified a £300-400m funding gap over the following 18 months, and that requirement had now been addressed.
- The market reaction reflected two key concerns. Firstly, the capital had been raised as debt rather than equity from a potential strategic investor. Secondly, the financing had been provided outside the existing Senior Secured Noteholder group, effectively creating structural subordination for existing creditors.
-While the transaction was clearly credit negative for existing bondholders, the bonds at c.55 cents implied a significant deterioration in recovery prospects and appeared to price a liquidation outcome. We were therefore revisiting our recovery analysis, but this was not our starting assumption.
- A key outstanding issue had been the collateral package. We had previously assumed that the majority of the Group’s key operating assets formed part of the shared collateral package securing the Senior Secured Notes, RCF and related facilities. The new financing was instead secured against assets transferred into a newly incorporated subsidiary, raising questions over which assets had been moved outside the existing collateral pool. Market speculation that the Gaydon manufacturing facility formed part of this collateral package appeared difficult to reconcile with the existing Senior Secured Notes documentation, under which AML explicitly granted security over Gaydon under English law.
- The headline financing comprised a £450m term loan, although approximately £190m was used to repay and cancel the existing RCF and Yew Tree facility. The transaction therefore provided c.£250m of incremental liquidity, alongside a potential £100m delayed draw facility and possible additional junior financing.

Recent Trading:
- There had been some concern that the new financing announced ahead of the H1 results was a signal that the underlying numbers would disappoint. However, the results were broadly positive and provided reassurance that the operational recovery remained on track. That said, they did not drive a meaningful recovery in bond prices, with investors remaining focused on the increased leverage and structural subordination created by the new financing.
- Aston Martin maintained its FY26 outlook, with wholesale volume guidance unchanged, but stopped short of committing to FCF neutrality in H2 despite the expected benefits from higher deliveries (particularly Valhalla), improved product mix and margins, working capital benefits and lower capex compared with prior periods. Cash generation therefore remained the key catalyst. Management expected a significant improvement in H2 cash flow as deliveries ramped and working capital normalised, but the key question remained whether this would translate into sustainable free cash flow after interest and capex.
- The refinancing had materially reduced near-term liquidity risk, but the investment case had shifted towards whether Aston Martin could demonstrate consistent cash generation without further reliance on external funding.

Two Questions, and uncomfortable answers:
- We return to our two original questions: can Aston Martin grow into its capital structure, and how will the next round of funding be raised?
- Our base case does not see the business becoming self-funding before the 2029 maturities. Even assuming gross margins approach 40% and production rises above 6,500 vehicles, free cash flow after interest remains negative through 2028.
- That leaves a further funding requirement in 2028. Following the NewCo transaction, the more important question is who will put in the new money, and consequently, will the bonds be further subordinated.
- Aston Martin's brand and strategic value could still attract external capital or a strategic investor, but that is difficult to underwrite as part of an investment case.

Happy to discuss.

Tomás

E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk