July 7, 2017 / 4:34 PM / a month ago

McLaren follows Aston Martin into bond market

* Luxury carmaker to use funds to buy out Ron Dennis

By Yoruk Bahceli

LONDON, July 7 (IFR) - British luxury carmaker McLaren is expected to make its debut in the international bond market this week with a good chunk of the proceeds going towards buying shares owned by its former chief executive, Ron Dennis.

The company, best known for its participation in the Formula One racing series, is seeking to raise a total of £525m-equivalent through sterling and US dollar notes.

The deal is reminiscent of peer Aston Martin, which issued in both currencies in March.

Both McLaren tranches (rated B2/B) will be five-year non-call two senior secured notes. Initial pricing thoughts on the sterling tranche have been set at the low fives, while the US dollar piece is indicated 75bp back from that.

"It's something we're looking at and probably going to play," said a trader, pointing to the company's diversification and position as a well-known brand. In addition to car manufacturing and Formula One, the company is also a technology and data solutions supplier.

"There are quite a few deals out there competing for investor attention. But, with a name like this, you don't have the problem of motivating people to come," said a banker close to the deal.

The Aston Martin notes (B3/B-) provide the best pricing reference points. It raised £550m-equivalent through 5NC2 notes split between a £230m portion at 5.75% and a US$400m tranche at 6.5%.

The notes have traded well since, with the sterling bid at 104.49 to yield 4.44% and the dollar at 103.52 or 5.45%, according to Thomson Reuters data.

FOOD FOR THOUGHT Although the McLaren name is capturing investors' attention some of the company's credit metrics could give food for thought.

The "need for heavy spending on new model development significantly depresses profitability", according to a recent research note from S&P.

In addition, McLaren's financial risk profile "is constrained by its very highly leveraged capital structure", said the rating agency. The bond will more than double financial debt to £525m.

And while the group reported revenues of £898m and Ebitda of £148m in 2016, S&P reckons the latter was "near zero" after taking into account £112m of capitalised development costs and foreign exchange loss estimates. Free operating cashflow was negative at around £35m.

"I think this is a challenge as you're dealing with a company that is nowhere near free cashflow positive. McLaren is spending as much in capex as it is generating in Ebitda. That's one where you're staring at a negative free cashflow story where there's no way out other than improving sales, which isn't always easy," said an investor.

"There's also the Formula One side, which is fine for now because they have contracts until 2020, but you've got to think that the brand will be affected by their performance."

STRUGGLING

McLaren's Formula One team has struggled in recent years and not won a race since 2012. Going into last weekend's Austrian Grand Prix, the team was last in the constructors' championship.

About £200m of the bond proceeds will be used to buy out Dennis's shares in McLaren Automotive and McLaren Technology Group, the two units that make up the company, though they are being merged into a new holding company, McLaren Group.

Dennis, who has been with McLaren for 37 years, agreed to sell his shares in both entities at the end of June after being ousted as chief executive in November, when McLaren's majority shareholders put him on "gardening leave".

He will receive a further £75m as deferred consideration, with half paid in December and the rest in August 2019. Proceeds will also be used to repay all of McLaren's £238m of outstanding bank debt.

The European leg of the roadshow ends on Friday. The deal is being marketed in the US until Wednesday.

JP Morgan, which also led Aston Martin's trade, is sole global coordinator and physical bookrunner, with HSBC as joint bookrunner. Barclays and Santander are co-managers. (Reporting by Yoruk Bahceli, editing by Sudip Roy, Matthew Davies)

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