Hedge funds have taken record short positions in the debt and equity of Aston Martin, betting that the luxury carmaker will continue to struggle after one of the most disastrous stock market debuts of recent years.
The 105-year-old carmaker has given investors a rough ride since it floated in October, with a 73 per cent decline in its share price that has wiped more than £3bn from its market capitalisation.
Hedge funds have turned to short selling the company’s debt, even though it costs large amounts in fees.
Sterling-denominated bonds that back the group have become the most expensive among any UK corporate debt for new borrowers, according to data from IHS Markit, with an annualised borrowing fee of up to 550 basis points. In comparison, it costs hedge fund investors about 50bp for an average sterling issue.
The carmaker has two sets of investable debt: a £285m bond maturing in 2022, which was issued in 2017, and a $400m bond that carries the same maturity.
IHS said there was a limited supply of sterling bonds now on offer to borrow, with a similar tightening of availability of the dollar debt, indicating the demand among short-sellers to take positions against the group.
Shorting debt is less common compared with more traditional bets taken by hedge funds against a company’s shares. The level of borrowing in the US-traded dollar bonds issued by Aston Martin is at the highest level on record at 10.3 per cent, according to IHS Markit, while the level of sterling bonds on loan is near its high of about 12 per cent.
Shares in the company on loan are also the highest on record in recent days, another indication of short positions against the company, at above 8 per cent. The percentage of shares on loan was about 5 per cent at the start of the year.
Aston Martin, which declined to comment on the short-selling activity, warned in July that the “external environment highlighted in May has worsened, as have macroeconomic uncertainties”, and “this softness will continue for the remainder of the year”. The shares, priced at £19 for the initial public offering, now trade at £5.11.
Sam Pierson, analyst at IHS Markit, said the high cost of borrowing showed a “willingness to pay” among hedge funds wishing to take positions against the company.
With a yield of about 9 per cent on the debt, this means that there is an annualised daily cost for shorting the debt of about 14 per cent. “This reflects a high level of conviction in the trade given the elevated borrow fee in addition to the coupon,” he said.
For some of the debt now, he said, “it is getting to the point where you couldn’t borrow for a price”.
Moody’s, the rating agency, downgraded the company’s corporate rating in July. It said that this reflected “the lack of progress in terms of volume growth and profitability for 2019 . . . and hence continued high negative free cash flow and high leverage”.
George Flynn, managing director of Everest Research, said it was hard to see any “positive short-term catalyst” to change the company’s financial position but that the end of the year could see a turning point. He added that the company could need to raise additional funds.
Additional reporting by Robert Smith
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