McLaren Finance PLC
McLaren Holdings Limited
Assignment of B2 Ratings
London, 16 May 2019 -- Moody's Investors Service (Moody's) has today changed the outlook to negative from stable for McLaren Holdings Limited (McLaren, company) and McLaren Finance PLC. Concurrently, Moody's has affirmed the B2 corporate family rating (CFR), B2-PD probability of default rating (PDR) of the company and B2 instrument ratings at McLaren Finance PLC.
The outlook change reflects the delay in achieving financial metrics that are in line with the B2 rating, including Moody's-adjusted debt/EBITDA of 6.0x and positive free cash flow after investments and interest. While Moody's recognizes the successful ramp-up of production volumes in the Automotive division and associated strong EBITDA growth, significant ongoing R&D investments and the choice to make certain changes in the Racing division, Formula One, resulting in significant losses, will reduce the pace of Moody's-adjusted EBITDA improvements at least until 2020.
McLaren's consolidated revenue increased 44.3% to GBP1.3 billion in 2018 and company-adjusted EBITDA improved 220% to GBP143 million in 2018. However, since Moody's expenses development costs, Moody's-adjusted EBITDA was negative and leverage stood at -4.9x. Similarly, free cash flow remained very negative due to the company's choice to continue with high investment levels as part of its Track25 plan. While the company should continue to generate meaningful improvements in profitability in 2019 and 2020 on the back of a full year sales of the McLaren Senna or in 2020 the sale of the McLaren Speedtail, Moody's also expects investment levels to remain close to 2018 for at least 2019 while Racing losses are likely to remain significant for both 2019 and 2020. Accordingly, the negative outlook reflects a greater risk to achieving a Moody's-adjusted debt/EBITDA of 6.0x on a sustained basis in the coming years and heightened risk of a downgrade.
Moody's recognizes that Racing losses are partly the result of choices made such as the change in engine. These losses have the potential to meaningfully decrease in 2021 given the pending plans to introduce a cost cap in Formula One. However, even in this case it remains uncertain at this stage whether a Moody's-adjusted debt/EBITDA of 6.0x will be achieved on a sustainable basis, which also depends on the company's investment plans at the time.
The affirmation of the ratings continues to reflect the (1) leading position as a designer and manufacturer of luxury cars across multiple price points; (2) strong brand recognition underpinned by the company's historical racing prowess as well as through the success of its performance car model launches; (3) high pricing power reflecting the demand for its vehicles that comfortably exceeds anticipated production; (4) clear focus on innovation and leading technological capabilities that are leveraged across the group; (5) customer diversification across multiple geographies; (6) meaningful revenue visibility reflecting the order backlog for its cars and through Formula 1 sponsorship arrangements and (7) supportive shareholder base.
However, the ratings also take into account (1) the high leverage and negative free cash flow; (2) shorter track record of producing road cars than for other manufacturers albeit mitigated by the success of its successful model launches and volume ramp-up; (3) significantly loss-making Racing activities that affect the financial strength of the company; (4) a degree of execution risk of ramping up automotive production to 6,000 cars per year by 2025; and (5) requirement to invest heavily in R&D activities to maintain its position as a technological leader. Moody's also notes a degree of uncertainty from Brexit, given the company's UK-based production and significant imports (suppliers) and exports (customers) to and from the EU.
Moody's considers McLaren's liquidity as adequate notwithstanding the significant investment plans announced through its Track25 plan for the Automotive business with GBP1.2 billion of investment from mid-2018 until 2025. As of December 2018, the company had GBP97 million of cash and GBP78 million available under the GBP90 million revolving credit facility (RCF) due 2022. Moody's understands that the company has further added GBP20 million of ancillary overdraft facilities in April 2019 as permitted under the RCF documentation and has received most of the remaining equity contribution, previously announced in 2018. The liquidity profile also continues to remain supported by the significant deposits contributed by customers well ahead of the sale of the cars. These sources should be sufficient to cover likely continued negative free cash flow for at least 2019 and a residual payment to a former shareholder later in the year. Moody's understands that the company expects limited further cash needs in 2020, but Moody's considers that this is also subject to some uncertainty as it depends on a continued strong EBITDA growth trajectory and no additional investment needs beyond the current plans. The next larger debt bullet maturity includes the GBP370 million and $250 million of senior secured notes that are due in July 2022. The company also has, as of December 2018, GBP109 million of uncommitted trade financing outstanding (2017: GBP44.8 million).
What Could Change The Rating Up/Down
Although unlikely given the negative outlook, Moody's-adjusted debt/EBITDA trending below 4.0x and a sustainably positive free cash flow could result in positive pressure on the rating. Conversely, negative pressure on the rating could increase from low profitability, Moody's-adjusted leverage staying above 6.0x, continued negative free cash flow or deteriorating liquidity. External events that negatively impact the McLaren brand could also cause negative pressure. Moody's notes that the rating and outlook do not incorporate the impact of a "no-deal Brexit", which could lead to negative implications for the outlook or rating.
The principal methodology used in these ratings was Automobile Manufacturer Industry published in June 2017. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.