Constellation Automotive Explores Private Credit Refinancing to Proactively Address 2027-2028 Maturities; TDR Prepared to Support With £450M Equity Injection

Reporting: Oscar Laurikka, Maryna Irkliyenko
Credit Research: Jennifer Chan

TDR Capital is working on a private credit deal for Constellation Automotive as the U.K. digital used vehicle marketplace attempts to proactively tackle its 2027 and 2028 maturities, sources told Octus, formerly Reorg.

The sponsor is prepared to make an equity injection to smooth any transaction and is working with Houlihan Lokey as financial advisor, the sources said.

While it has been a high-yield and syndicated loan issuer since July 2021, Constellation Automotive is now in talks with direct lenders about a potential refinancing, sources told Octus.

The company is seeking to raise about £1.255 billion in seven-year first lien debt, split between sterling and euro tranches, and TDR will contribute £448 million equity, sources said. Proceeds from these, alongside some of the non-restricted cash on balance sheet and drawing under a new £250 million super senior RCF, will be used to refinance in full the company’s outstanding debt and pay transaction-related fees, including a 1.2188% redemption fee on the senior secured notes due 2027.

As illustrated below, pro forma for the proposed refinancing and equity injection, the company’s net leverage will fall to 6.9x (5.9x on a pre-IFRS 16 basis) from 8.7x (8.3x on a post-IFRS 16 basis) as of June 30, as the shareholder investment provides significant deleveraging on day one.

As of June 30, Constellation Automotive had £695 million 4.875% senior secured notes, or SSNs, due 2027, £400 million first lien term loan B due 2028, €400 million first lien term loan B due 2028 (£339 million-equivalent) and a £325 million second lien term loan due 2029. It also had drawn £20 million on its RCF due 2027 and had a £300 million asset-backed partner finance facility maturing in January 2028, whose maturity has been extended by three years during fiscal year 2024,or FY’24, ended March 31, 2024.

As of Dec. 17, the SSNs are quoted at 90.6 cents, yielding 9.1%. The sterling first lien TLB is quoted at 94.3c, bearing Sonia plus 475 bps, implying a yield of 10.42% as calculated by Octus based on the SONIA forward curve as of Dec. 17. The euro first lien TLB is at 93.9c, bearing Euribor+400 bps, implying a 7.91% Octus-calculated yield and the sterling second lien loan is at 81.2c, bearing SONIA+750 bps, or a 16.84% Octus-calculated yield.

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Fitch downgraded the group to CCC+ in August amid uncertainty around EBITDA growth and deleveraging due to continuing subdued new car market and consumer demand. Similarly, Moody’s revised the outlook on the B3 rating to negative in October, reflecting that weaker results and a slowing growth trajectory could make a timely and cost effective refinancing difficult.

We believe one reason why Constellation Automotive may act earlier than the typical 12-to-18-month refinancing window is an expectation that performance could worsen in the short term as hinted in the FY’24 annual report. In our view, with a net leverage of 8.7x (8.3x on a pre-IFRS 16 basis), coupled with a bleak industry outlook and the weak rating, it is increasingly unlikely that the company will be able to tap the primary market next year. Therefore, private credit may be a more suitable solution to address maturities now, in order for management to be able to focus on dealing with the industry headwinds next year.

After a dividend recap in July 2021, Constellation Automotive failed to deleverage as illustrated in the chart below:

Constellation Automotive’s vertically integrated model links it to both the used and new vehicle markets. New car registrations remain far below pre-pandemic levels, while electric vehicle uncertainty disrupts the entire sector; used values are falling due to weak demand, and original equipment manufacturers, or OEMs, face mounting pressure to meet the zero emission vehicle, or ZEV, mandate. Dealer demand in the U.K. also looks shaky, with the looming motor finance claim case set for implications in 2025. Meanwhile, corporate spending is tightening following recent hikes in national insurance contributions.

The proposed refinancing will reduce gross debt excluding leases by 27% to about £1.3 billion, but a higher interest rate, as typically demanded by direct lenders versus the broadly syndicated market, will continue to burden the company’s cash generation capacity. An instrument with an option to PIK should aid the burden.

For example, if we assume a 600 bps margin over the reference benchmark rate on the new £1.255 billion private debt, Octus calculates £130 million in interest payments, which compares to Octus estimates of £136 million based on the current capital structure and excluding RCF drawings. The company reported £146 million cash interest payments in FY’24 ended March 31 and £149 million in the LTM period to June 30. Our latest European Direct Lending figures show that in the latest quarter, average leverage multiples are 5.1x, while the average margin is 593 bps, so the proposed leverage of 5.9x marketed on a pre-IFRS 16 basis would demand at least 600 bps pricing in our view.

We had expected TDR to be supportive of the business, as outlined in our credit analysis published in November 2022 and our liquidity options covenant analysis published in January 2023. We estimated that the sponsor retains a £270 million equity investment in the business based on £1.906 billion of the offer value of the group in 2019 less the £1.237 billion funding package (including £972 million facilities and £265 million second lien facilities), net of £400 million dividend distribution made in the July 2021 transaction.

This year TDR has also supported U.K. pub chain Stonegate’s refinancing by contributing £250 million, as detailed in our primary analysis on Stonegate’s SSNs due 2029 HERE. The market was observing Stonegate’s refinancing as it may become the template for what TDR will do with Constellation’s outstanding maturities, one investor had said.

According to the company’s accounts, Constellation Automotive is due to report earnings for the second quarter ended Sept. 29 by Dec. 28.

Industry Headwinds to Affect Upcoming Performance
Constellation Automotive is a vertically integrated digital car marketplace with over 80% of revenues in the LTM period to June 30 generated in the U.K., and the remainder generated in Europe. The vehicle remarketing segment, or VR segment, mainly generates revenues from auction transaction fees from its B2B market place under the brand British Car Auctions, or BCA, and 35% of the vehicles accounted for in BCA relate to vehicles bought and sold in its vehicle buying segment (as of FY’21 ended March 28).

In the vehicle buying, or VB segment, the company generates revenues from purchasing used vehicles directly from consumers in the U.K. under WeBuyAnyCar and selling them under BCA. In Europe the purchasing of used vehicles comes from corporates under a B2B model.

The VR division’s vendors are divided into five main groups: (i) dealers (23% of the group’s volume of cars sold in FY’21); (ii) vehicle buying (35%); (iii) corporates; which include leasing and OEM finance companies, (21%); (iv) OEMs (7%); and (v) trade and others (15%).

The following three factors will likely affect performance for the company in at least the next couple of years:

Dealer Demand Expected to Lower Following Motor Finance Claim

A U.K. Court of Appeal judgment on motor finance commission claims, released Oct. 25, could have wide ranging implications beyond vehicle finance, lawyers told Octus. The financial impacts for finance providers could be as large as U.K. payment protection insurance, or PPI, claims, some suggested.

Many motor finance providers including Close Brothers and Blackhorse (part of Lloyds Bank) had initially stopped providing fresh loans, with the latter provisioning £400 million against potential claims. Lenders have tentatively resumed lending, but if not overturned the appeal ruling could have lasting impacts on the new and used car markets and residual values, the lawyers cautioned, with a number of car dealer groups likely to come under financial stress.

In early December, the FCA urged the Supreme Court to hear an appeal. Close Brothers recently announced that the Supreme Court has granted it permission to appeal. The case is likely to take place during the first half of 2025, according to legal sources.

Reduced supply of fresh loans and expected reduced profitability for brokers or dealers from the appeal ruling could potentially cause further supply restrictions, leading to reduced volumes being transacted by dealers on Constellation Automotive’s platforms.

Leasing and OEM Finance Companies Demand Expected to Subdue

The unexpected large fall in battery electric vehicle, or BEV, prices in the used vehicle market has caused large pressure on long-term leasing and OEM finance companies, with performance set to deteriorate further as a higher proportion of BEV leases are terminated. The residual value, or RV, profits made when the vehicle is sold at the end of the lease period has reported a loss in at least the last 12-month period.

At the end of 2020, leasing companies started to incorporate BEVs into their fleets. With leasing contracts lasting around three to five years for corporates – the largest demand market for new BEVs, given friendly benefit-in-kind initiatives in the U.K.- the pain for leasing companies is only just beginning. See our cash flow model showing potential impacts on U.K. vehicle lessor Zenith, and a comparison on lessors covered under Octus HERE.

The fall in the used BEV market resulted from low demand exacerbated by discounts on new BEVs by OEMs. This resulted from OEMs coming under pressure to offload new BEVs, alongside to meet certain targets including the ZEV mandate.

OEMs Demand Expected to be Affected in Automotive Services

The ZEV mandate currently requires that 22% of all new registered vehicles be zero emission, slowly increasing to 100% by 2035. This has and will cause a lot of uncertainty around the supply of new vehicles. The automotive services segment prepares, stores and transports new cars for OEMs.

Another consideration is the fact that the national insurance contribution for employers or corporates has increased following the announcement last month, which could result in lower demand from corporates for fleets, and given they contribute for the majority of BEV purchases, will affect meeting ZEV targets.

Company’s Recent Performance
In the first quarter of FY’25 ended June 30, the group’s revenue decreased by 15.5% year over year to £1.396 billion and in the LTM period ended June 30, revenue declined by 20.4% to £5.531 billion.

The VB segment in the U.K. contributes largely to top-line volatility as shown in the chart below. The segment has continued to rebuild since purchasing was scaled back following price instability in the third quarter of FY’24 ended Dec. 31, 2023.

VR in the U.K. has also seen a decrease in the LTM period to June 30 of 16.5% to £2.396 billion, mainly driven by retail customers switching to a direct vendor relationship. In a direct vendor relationship, customers purchase wholesale vehicles from auctions and separately contract for refurbishment services from BCA fleet solutions.

The automotive services business has seen revenues recover significantly in FY’24 ended March 31, almost doubling year over year to £447.2 million. This is partly driven by the recovery in new vehicle registrations in the U.K. but also partly driven by the switch of customers to the direct vendor relationship in which BCA fleet solutions revenue is recorded here.

U.K. 2023 new car registrations totaled 1.9 million, the best since the pandemic and exceeding forecasts as shown below, but lagged 2019 levels by around 17%. The latest financials ended June 30, revised downward the 2024 SMMT forecasts of new car registrations to reach 1.97 million and 2.03 million in 2025 in response to a downward view on BEVs. This compares with 1.98 million and 2.05 million respectively, as of the publication of results ended March 31.

Source: p14 of the FY’23 company presentation

Adjusted EBITDA (post-IFRS 16) in the LTM period to June 30, has recovered largely to £255.9 million since the large drop in FY’23 ended April 2, 2023 to £201.6 million, compared with a strong year in FY’22 of £336.3 million. Since FY’22, the trend in normalization of VB was more than offset by lower new vehicle registrations, which has slowly recovered but current trends include WeBuyAnyCar’s current focus on lower price vehicles. Adjusted EBITDA margin in the LTM period is 4.6%, up from 4.3% in FY’24 and 4% in FY’22, but below the 6.2% recorded in FY’21.

In FY’24 ended March 31, Octus-calculated levered free cash flows amounted to £17.2 million mainly driven by a positive working capital inflow of £70.3 million. However, a high interest burden continues to weigh on the company, given £1.1 billion in term loans is floating-rate and the company does not have any hedges in place. In FY’24, the company received £58.3 million from asset sale proceeds consisting of the sale of unused parts of the Rockingham site and the sale and leaseback of the Barneveld Auction site in the Netherlands.

Levered free cash flow has been negative between FY’21 and FY’23, averaging around £50 million. In FY’21, the cash burn was driven by negative working capital movements of £100 million, following which the company looked to move to a direct vendor relationship which would eliminate working inventory holding risk. In FY’22 levered free cash flow burn amounted to £38.5 million and £10.4 million in FY’23, driven by high capex of £162 million and £80 million, respectively compared with average levels between FY’18 and FY’24 excluding the high levels of around £48 million. The high capex was related to expansion capex and related to expansion of the group’s storage and refurbishing facilities.

Constellation Automotive’s historical financial performance is below:

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TDR and Houlihan Lokey declined to comment.