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McLaren facing insolvency?

NEWS STORY
23/06/2020

McLaren, one of the most famous names in the history of the sport, and the second most successful team in terms of drivers' titles, is facing insolvency, and heads to court as the presiding Judge admits the suggested trial timetable is "ambitious" and the "most aggressive" he has ever witnessed.

The Woking team recently paid tribute to team founder, Bruce McLaren, who was killed testing one of his legendary Can-Am cars at Goodwood in 1970.

Following McLaren's death, the team was run by Teddy Mayer, brother of Timmy Mayer, who had been killed driving a McLaren-entered Cooper in the Tasman series in 1964. Throughout most of Mayer's stewardship McLaren prospered. It secured sponsorship from Marlboro and won drivers' championships in 1974 (Emerson Fittipaldi) and 1976 (James Hunt) and the Constructors' Championship in 1974.

By the end of 1977, McLaren had won 20 Grands Prix, but the introduction of ground effect saw it lose the plot, in 1978 and 1979 it McLaren scored just 15 points each season, in 1980 it was down to just 11 points and Marlboro was losing patience.

In the meantime, Ron Dennis had commissioned John Barnard to design a new Formula One car, which would have a carbonfibre monocoque. Dennis had been running a preparation company, Project 4, which had run cars in F2 and F3, and which had also prepared cars for the Procar Championship.

Dennis had established a reputation second to none for his standards and had also forged close links with Marlboro. At the end of 1980, and with the assistance of Marlboro, he took 50% of McLaren shares and became, with Mayer, joint managing director. Within 18 months Dennis was in sole charge.

With Dennis at the helm McLaren went from strength to strength, winning titles with the likes of Niki Lauda, Alain Prost, Ayrton Senna, Mika Hakkinen and Lewis Hamilton. He also took the company into the Supercar market and established an engineering division which applies developments from racing to other industries.

Over the years Dennis reduced his stake in the company to just 25%, and it was for this stake that McLaren paid £275m ($333m) when he stood down in early 2009.

In order to secure the £275m, McLaren raised a sterling bond of £370m ($450m) and a $250m dollar bond on the international stock exchange.

Other than using the money raised to pay Dennis, it was also used to repay shareholder loans, refinance debt and settle transaction fees.

When the dust had settled Bahrain's Mumtalakat sovereign wealth fund was left in control with a 57.7% stake, while Mansour Ojeh's Saudi TAG Group held 14.7%, Michael Latifi 10% and the remainder owned by minority investors.

The bonds are secured on a range of assets including its collection of historic cars, its factories (sorry Ron) and its Intellectual Property portfolio.

Heading into 2020 things were looking good, especially coming off the back of the team's best season since 2012. Sales of its various supercars had been so successful, the company announced that it was to reduce production in a bid to make them even more exclusive.

While, when one hears the name McLaren one automatically thinks F1, last year the team accounted for just 12.5% of group revenue, while the supercar division contributed 83.9% of the group's £1.5bn ($1.8bn).

Then came the pandemic.

Before the virus, McLaren shareholders had injected £300m ($368.8m) in order to tide the company over as it scaled down production however, as the virus took grip the money had to be diverted in order to keep the company going though it soon became clear that even more cash would be required.

As previously reported, in the first three months of this year McLaren sold just 307 cars compared to the 953 sold in the same period last year. As a result revenue crashed from $217.7m to $136.2m while its pre-tax loss rocketed by 600% to $165.6m.

Worse was to follow however, for McLaren, which pays suppliers 60 days after the end of the month in which they submit their invoice, still had to pay for the cars built in the first three months of the year.

As a result the company admitted "an unexpected need for liquidity which will impact the Group around the middle of the year".

"Working capital funding is being sought to support the Group's liquidity requirements with discussions with third parties ongoing," it admitted. "McLaren Group is currently looking at a number of potential financing alternatives, secured and unsecured, of up to £275 million [$333 million]."

In other words, as Forbes so succinctly puts it, "McLaren needs money to pay the bills for the cars that it made before the pandemic began because it isn't selling enough of them to cover the costs".

As previously reported, in order to raise money, having been turned down by the Department for Business, Energy and Industrial Strategy for a loan of £150m, McLaren revealed that it was seeking to borrow against its collection of historic race cars and its facilities.

Only last week, it was claimed that the company is looking to sell a "minority" stake of up to 30% in its efforts to raise cash.

However, the owners of the company's bonds, known as Note holders, have refused to release the assets from the security.

Instead, fearing they would be left high and dry if the money owed by McLaren was no longer secured on the assets, the Note holders suggested an alternative financing plan, a move with which McLaren disagreed and consequently took legal action over in the hope that the judge will release the assets.

In legal filings for a hearing in London's High Court on Friday, McLaren said that "the Proposed Transactions will enable the Group to access the additional liquidity that is required to ensure that the Group can continue as a going concern into 2021. This will provide a significant benefit to the creditors of the Group (by preventing a cash flow crisis and a value destructive insolvency)."

In other words, McLaren warns that it will become insolvent if the Note holders don't allow it to release the assets from the security and sell them or secure a new loan on them.

To further complicate matters, it warns that the judge must issue a declaration in favour of McLaren in 17 days in order to get the deal done.

The filings reveal that "the Group needs to obtain declaratory relief in advance of 17 July 2020. Due to the period of time required to sign the contractual documentation and arrange for the relevant funds to be paid, declaratory relief would in fact need to be granted at least five business days before the funds are required. In other words, declaratory relief is required by no later than 10 July 2020."

10 July, of course, falls bang in the middle of the two races at the Red Bull Ring, which should certainly add to the pressure on the team.

According to one side, the Note holders' case is based on a clause in the bond agreement which prevents McLaren from disposing of "all or substantially all" of its assets, while McLaren contends that "even if one excludes the value of the McLaren brand and intellectual property, the Heritage Cars and the Properties are responsible for about a fifth of the Group's revenues and about a quarter of the Group's total assets."

The Note holders' lawyer wrote to McLaren's lawyer on 14 June, saying that the litigation would not be fruitful as it "will not be concluded before the Group runs out of cash."

The letter added that if this happens, "the one remaining realistic financing option open to the Group, namely the transaction with the Note holders will collapse and the Group will then have no realistic prospect of avoiding an insolvent liquidation."

Nonetheless, McLaren is continuing with its action and on Friday asked Judge Anthony Mann to expedite the proceedings.

While he agreed that a swift trial is justified given the risk of insolvency, he admitted that the suggested trial timetable is "ambitious" and the "most aggressive" he has ever seen.

While a case of this importance might normally be spread over months, the parties have proposed to deal with it at a two or three day trial starting July 2.

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READERS COMMENTS

 

1. Posted by Wokingchap, 25/06/2020 9:24

"Good luck McLaren, this is probably the worst situation they have ever been in. Good luck."

Rating: Neutral (0)     Rate comment: Positive | NegativeReport this comment

2. Posted by nnails, 24/06/2020 17:09

"Williams , hass , renault and now mclaren . F1 is running out of desk chairs."

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3. Posted by Whatabout..., 23/06/2020 22:11

"That little history in the article left out 2007’s Ferrari-gate and the fine ($100M) that crippled McLaren. That distraction from racing, the cost of litigation, civil and FIA, may have exacted short term and long term internal financial penalties of a similar magnitude.
Ron D should stay retired and a new silver knight should save McLaren."

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4. Posted by Bill Hopgood, 23/06/2020 20:26

"This is very concerning not just for McLaren Group as it shows just how precarious the financial situation will be for many businesses, all around the world.
I'm no financial wiz however it does appear that there wasn't much put aside for a rainy day, not that one can fully prepare for lockdowns we have all seen (and that's where the government loans should be used, though very judiciously as it is the state that has curtailed the ability for the companies to do business).
McLaren like all businesses are going to need to slash costs, everywhere and that means, sadly, laying people off.
They will need to do that in order for there to be some business left to keep some people employed.
Would you put money into McLaren (or any auto manufacturer) right now with the current global financial situation?
Perhaps there is a wealthy benefactor or consortium out there such as what has happened to Aston Martin?
The problem with that approach is that the existing shareholders will have to dilute their holding and a new buyer will be coming in cheaper than what the previous shareholders did and that could put a lot of pressure on some big egos.
I see some comments here about Ron Dennis getting back into the frame.
I suspect he has moved on to other things now and this situation may require a different skill set to sort out.
Whatever happens in the near future, I hope like heck that McLaren survive to race another day, though, if F1 is costing them, and making cars is profitable...
"

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5. Posted by Jezzer, 23/06/2020 19:14

"Very sad situation for yet another great team. Let’s keep our fingers crossed that they/someone can stop the rot. "

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6. Posted by BrightonCorgi, 23/06/2020 18:33

"I'd like to see a Ron Dennis lead group provide financing and re-take McLaren. As soon as he was pushed out, they lost their chops in F1 and allure of what makes McLaren so special slowly withered. "

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7. Posted by danielmb, 23/06/2020 17:14

"It sounds like there really isn't a risk of "future" insolvency. Insolvency is already here for McLaren! I'm certain Ron Dennis is paying very close attention."

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8. Posted by Editor, 23/06/2020 13:23

"@ Rock Doc

Wait a few more weeks and he can put Williams in the basket also, along with Haas and possibly F1 itself."

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9. Posted by Rock Doc, 23/06/2020 13:21

"@ Lakota Waiting for them to go bust so he can swoop in and buy it up at a rock bottom price."

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10. Posted by Lakota, 23/06/2020 12:26

"Where's the Ronster when you need him ???"

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