Aston Martin’s debt red flag and Sainsbury’s makes baby steps with recovery

“A sharp drop in the oil price drags the FTSE 100 down 0.6% to 7,249. New data yesterday showed a greater than expected build-up of crude oil in the US, shocking the market. Now we have US President Donald Trump once again criticising Beijing’s trade practices which has caused investors to become less hopeful about an amicable resolution to the US/China trade war,” says Russ Mould, Investment Director at AJ Bell.

“Brent Crude prices fell 1.1% to $62.38 per barrel, leading to a 0.3% decline in FTSE 100 heavyweight Royal Dutch Shell and a 1% drop in BP’s shares."

Aston Martin

“The car manufacturer is known for its high end prices and that situation now also applies to its debt.

“Aston Martin is taking on $150 million of extra borrowing with a 12% interest rate, as well as an option to have another $100 million at 15%.

“These rates are very high and are a major red flag that investors consider the car company to be a high risk entity.

“Metro Bank couldn’t get enough support for its bonds earlier this week at 7.5% despite investors around the world scrambling for new sources of income in a low interest rate environment.

“So Aston Martin pricing its debt at up to twice this level would suggest it really needs the money and has had to bow to investors’ demands.

“In such situations, investors have the upper hand and demand a high level of reward to compensate for the risks they are taking.

“Part of Aston Martin’s debt is structured as a PIK or payment-in-kind. Rather than paying interest each year, the interest is rolled up and you end up paying a higher overall payment at maturity.

“History tells us that companies with high debt repayment obligations, particularly those involving PIK notes, can get into real trouble in a market downturn if earnings are hit and they struggle to service the debt.”

Sainsbury's

“The supermarket is making progress one small step at a time. Its latest results show an improvement with grocery and clothing sales, an intention to shift more Argos counters into Sainsbury’s stores, and a plan to tidy up the financial services arm.

“Sainsbury’s turnaround is going to be like a juggernaut, taking a very long time to reposition the business in the right direction.

“Retailing is about giving customers what they want, how they want and at the right price. Management also need to make sure the business is running efficiently both in terms of making a profit and customers have a smooth experience when doing their shopping.

“There is a plan in place; now the hard part is executing it.

“The latest sales data is encouraging and investors certainly like the strategic update regarding new ways of cutting costs via closing weaker stores.

“Chief executive Mike Coupe should be pleased that there are green shoots of a recovery, particularly after all the criticism he received over how the failed Asda merger distracted management from the day-to-day running of Sainsbury’s.”

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