Efforts by UK sports car maker McLaren to raise emergency funding have triggered a spat with its bondholders, who say they already have a claim on a collection of classic cars it is trying to pledge to new lenders.
McLaren, which owns a Formula One team in addition to making high-end sports cars, has this month sounded out hedge funds and other investors about a new bond deal of at least £250m, according to people familiar with the matter, and has hired JPMorgan to manage the deal.
The company is offering to mortgage its headquarters in Surrey and a valuable collection of what it calls “heritage cars” to the new lenders. Those assets would be offered up as collateral to raise money needed to ride out the coronavirus-related interruption to the F1 season, along with a plunge in demand for new cars.
But investors in McLaren’s existing £525m bond issued in 2017 are fiercely resisting the move. They argue that the company already pledged these assets to them in that deal, when the debt was raised to buy out a stake owned by the group’s former chairman Ron Dennis.
A group of bondholders has hired US law firm Paul Hastings to push back against the new fundraising, according to people familiar with the matter. On Wednesday the group sent a letter to the company’s management to outline their opposition to the new deal.
McLaren did not immediately respond to a request for comment. JPMorgan declined to comment.
While the company and its advisers believe the move is legal, the bondholders argue that the company is trying to abuse a loophole often known as a “J Crew trapdoor”, after the recently bankrupted US retailer. The company’s private equity owners caused uproar when they pulled off a similar trick in 2017 by transferring intellectual property rights across to new lenders.
In contrast, the brand and intellectual property of McLaren would stay with its existing bondholders under the proposed deal, but certain physical assets would be transferred across to the new lenders.
The documents for the carmaker’s 2017 bond deal value the company’s technology centre, production centre and its heritage cars at nearly £600m. The documents explicitly state that the debt would not be initially secured against the classic car collection, but suggest that these vintage vehicles — then valued at £170m — would be pledged to bondholders in future.
Similar disagreements over collateral have erupted in US debt markets in recent weeks and months. The McLaren spat suggests that tensions are spreading to Europe, as companies that missed out on state support seek creative ways to pawn their assets for private sector financing.
Sky News reported earlier this month that McLaren has resorted to this expensive new round of fundraising because the UK government rejected its request for a £150m loan. The group’s shareholders, which include Bahrain’s sovereign wealth fund Mumtalakat, provided £300m of fresh equity to the business in March.
The US junk bond market has seen tens of billions of dollars of new deals secured against assets, some of which have caused alarm because existing lenders have been “primed” — market parlance for when new debt is given priority ahead of old bondholders.
In contrast, Europe has so far seen little secured corporate debt issuance, as many large companies have been able to tap government-backed lending schemes via their banks.