Investing.com -- Fitch Ratings has revised the outlook for Aston Martin (LON: AML ) Lagonda Global Holdings PLC (AML) from stable to negative, while maintaining its Long-Term Issuer Default Rating (IDR) at ’B-’. Aston Martin Capital Holdings Limited’s senior secured rating was also affirmed at ’B’ with a Recovery Rating at ’RR3’.

The revision in outlook reflects a larger-than-anticipated free cash flow (FCF) shortfall in 2024, due to supply chain issues, reduced demand in China, and liquidity risks due to further delays in turnaround. Despite AML’s plans not to access debt capital markets this year to fund cash shortfalls, Fitch sees its cash flow generation and liquidity as vulnerable to challenging market conditions, turnaround execution risks, and potential tariff introductions.

AML reported a negative FCF of GBP392 million (or EUR408 million Fitch-adjusted) at the end of 2024. This deficit was mainly driven by supply chain problems, decreased demand in China, and working capital outflows due to lower customer deposits after special deliveries. With a fully renewed product line, AML aims to achieve substantial FCF improvements in 2025, assisted by the Valhalla program. However, Fitch now projects that FCF generation will turn positive only in 2027, due to turnaround delays and higher FCF break-even as a result of additional interest expenses from notes add-ons issued in the second half of 2024.

Aston Martin experienced a significant decline of 49% in wholesale volumes in China in 2024, partially attributed to a model change-over introduction. Fitch expects weak market conditions in China to continue to impact sales in the short term as AML addresses excess inventory and revises its dealership base.

AML remains heavily exposed to the potential introduction of tariffs for imports into the US, a market that represented 37.3% of total sales in 2024. Any increase in import costs into the US can have a significant impact on AML’s profit-and-loss (P&L) statement and cash flow.

At the end of 2024, AML reported an order book extending up to five months on the core models, significantly below other luxury carmakers. AML aims to expand its range of model variants and provide customers with around 100 options for personalizing their vehicles, a strategy that is expected to boost profitability.

AML plans to reduce adjusted operating expenses through greater operational discipline, focused spending, and rightsizing, in response to inflation and growth-related costs. This involves reducing 5% of its global workforce to achieve annualized savings of approximately GBP25 million, with half of these savings expected in 2025.

AML has received almost GBP2 billion in equity support from its shareholders since 2020. However, further delays in execution may pose a challenge in funding additional cash shortfalls. Compared to McLaren Holdings Limited (MHL; CCC+), AML has the highest leverage and weakest FCF generation among Fitch’s rated auto original equipment manufacturers.

Fitch’s key assumptions for the issuer include a revenue compound annual growth rate (CAGR) of 10.1% for 2024-2028, led by sales of new models and special deliveries, and EBITDA margin expanding above 20% by 2028 on higher volumes and progressively increasing average selling price per vehicle.

The recovery analysis assumes that AML would be reorganized as a going concern in bankruptcy rather than liquidated. It leads to a ranked recovery for the senior secured debt of ’RR3’, supporting the ’B’ debt rating at one notch above the IDR.

Factors that could lead to a negative rating action or downgrade include continued negative FCF generation leading to deteriorating liquidity and EBITDA leverage above 4.0x for a sustained period. Conversely, successful execution of the business plan, maintaining FCF margins at above 0.5%, EBITDA leverage sustained below 2.5x, and EBIT margin of above 6% could lead to a positive rating action or upgrade.

AML’s liquidity is viewed as appropriate, but there is an increasing risk of additional external funding needs if the company cannot execute its product launches and significantly reduce its FCF shortfall in 2025. This is despite the company’s GBP360 million cash on its balance sheet and a largely undrawn super senior revolving credit facility (RCF) of GBP170 million at the end of 2024.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.