How Aston Martin showed bondholders the hard shoulder
The low price of the company’s bonds suggests even senior creditors are gloomy about their prospects
Close a door and a window opens. Close the window and it turns out there’s a trapdoor hidden under the rug. This is, in essence, how things work in corporate debt. A fight at Aston Martin shows the problem.
The UK carmaker beloved of fictional spy James Bond was a £4bn company with a little debt when it went public in 2018. Now it’s a £350mn company with more than four times that much in net borrowings. Interest expenses consumed almost all of last year’s ebitda; raising new debt in the market now would be tricky and costly. The low price of Aston’s bonds suggests even senior creditors are gloomy about their prospects.
Now gloom has turned to indignation. Last month, Aston Martin borrowed up to £550mn from new lenders led by BlackRock subsidiary HPS, but did so by moving assets into a newly formed subsidiary. Collateral existing bondholders thought backed their claims is now out of reach.
This sort of thing isn’t supposed to happen any more. After a famous case involving US clothes retailer J Crew roughly a decade ago, bond documents — including Aston Martin’s — commonly come with provisions limiting companies’ ability to move collateral into new “unrestricted” shells that fall outside bond covenants.
In this case, though, the “J Crew blocker” wouldn’t restrict moving intellectual property assets into what is known as a “non-guarantor restricted subsidiary”, or sales to a third party like Authentic Brands, according to Covenant Review analysts.
Moreover, it seems bondholders might have been implicitly protected thanks to safeguards attached to a different loan — its £170mn revolving facility. But once that had been repaid, according to a person familiar with the situation, Aston Martin may have had more leeway to make the controversial transfer.
The bondholders have threatened legal action, which isn’t surprising, since rating agency S&P reckons they would get back just 25 per cent of their investment, absent the relocated assets.
The question, then, is whether J Crew blockers are up to the job. Such clauses are increasingly widespread: in Europe, half of last year’s high-yield bonds included a J Crew blocker, according to Moody’s.
The problem is that the rise of these blockers is increasingly accompanied by generous exceptions. In 2020, European bond agreements typically allowed companies to transfer assets worth about 60 per cent of ebitda through various carve-outs. By 2025, that had risen to roughly 100 per cent of ebitda, according to Moody’s.
Their sheer complexity also adds risk, because disputes rely on finely balanced interpretations. US photocopier maker Xerox found a technically legal way to move assets out of its original lenders’ reach to secure new financing through a joint venture. Aston Martin’s creditors, who believe the deal breaks English insolvency law, may hope a different jurisdiction brings a more favourable outcome.
Lenders to other companies will no doubt see this as a cautionary tale, and try to be even more vigilant. The best thing they can do is assume there’s always a trapdoor — and that desperate borrowers will go all out to find it.