The Precarious State of MV Agusta

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MV Agusta as a motorcycle company has always seemed to have feet of clay, especially when its financial future is concerned. Today is no different, as MV Agusta has announced its intentions to restructure its debt, in order to keep the company afloat.

Afloat is an interesting phrase, as the storied Italian brand has changed hands four times in the past 12 years, with two of those purchase prices being a token euro, as MV Agusta’s liabilities far outstripped the company’s assets and holdings.

Fast-forward in time and it would be easy to say that not much has changed, as MV Agusta now has €40 million in liabilities on its balance sheet, all non-essential staff have been furloughed, the production lines in Varese recently have been motionless.

While this seems like more of the same from MV Agusta, the situation is far more complex, and for once in its lifetime, it isn’t MV Agusta’s lack of sales that are to blame. In fact, it’s the opposite, as it is MV Agusta’s success in growing its motorcycles that is the cause of its current financial situation.

That might seem like a counterintuitive notion, but if you understand the relationships between chickens, eggs, and which came first, then you will understand the situation at hand here with MV Agusta.

And while this impasse isn’t a new one in the business world, it doesn’t change the fact that the future of MV Agusta is in a precarious state.

Of Chickens and Eggs

The central issue in MV Agusta’s current financial crisis is that the Italian motorcycle manufacturer cannot payoff its debt.

MV Agusta can’t payoff its debt, though, because it doesn’t have the cash to do so, and it can’t generate more cash without having access to more capital.

But, MV Agusta can’t raise more capital because it already owes too much money to its lenders, and the motorcycle company cannot take on another equity investor because that would dilute its partner AMG.

AMG’s position in MV Agusta, though, cannot be diluted because doing so would trigger its own set of issues, namely that MV Agusta would have to immediately pay off a large portion of its debt. Circle back to the top, if you don’t understand why that is an issue.

A Problem Long in Creation

To understand how MV Agusta got to this point, we first need to look much further back in the company’s past, when it was first divested from Harley-Davidson.

To its credit, the Bar & Shield brand did a great deal to get MV Agusta on two feet again.

Harley-Davidson wiped MV Agusta’s debt clear, it modernized MV Agusta’s facilities in Varese, and it footed the bill for MV Agusta’s R&D on the three-cylinder motorcycle lineup. Harley-Davidson also filled up MV Agusta’s coffers, to the tune of €20 million – a detail that often gets lost in the shuffle.

This €20 million figure was supposed to cover 12 months of operating budget for MV Agusta, and while it was a merciful move by Harley-Davidson, you can consider that figure only shade of what would be needed for its stated goal.

The very general rule of thumb here is that you need roughly €100 million to launch a motorcycle company in Europe.

Cash is King

Make no mistake, MV Agusta emerged from Harley-Davidson in a much better position than when it had been when it was acquired by the American behemoth, but the genesis of MV Agusta’s problem starts at this point in the company’s story, as the Italian brand was extremely undercapitalized for the job it had to do.

MV Agusta was undercapitalized, partly because of timing. This is because in 2010, access to institutional capital was virtually non-existent – both in the USA and in Europe – and that was for borrowers with a good credit history.

For a company like MV Agusta, which had been the poster child for financial instability, especially under Castiglioni control, the idea of getting a major lender to finance the company’s future was the kind of joke Wall St. types would tell each other on the way to their afternoon squash games.

Give credit to the Castiglioni’s ingenuity though, the Italian brand created a deal that saw AMG brought on, not only as a strategic partner, but also a minority investor in the motorcycle brand.

AMG bought a 25% stake in MV Agusta, which not only directly brought in a much needed cash infusion (rumors peg this figure at €30 million), but more importantly the German company brought the gravitas of the AMG brand, which helped ease the reluctance of financiers.

With AMG on-board, MV Agusta’s virtual credit score went up in the eyes of the banks; and as such, the door was opened for a €15 million loan from Banca Popolare di Milano (BPM).

Later, MV Agusta would take on another €25 million in debt to suppliers, bringing us to our €40 million figure.

You Have to Spend Money to Make Money

Even for those with an MBA, this is a complex money issue. After all, how does a company with stellar growth and budding sales have a money problem? It seems counter-intuitive. Let’s see if we can boil this problem down to its elements, in order to gain some understanding.

The first thing to understand is that there is a 12 to 18-month gap from when a company like MV Agusta spends money to make a motorcycle, to when a company like MV Agusta gets paid for the sale of that motorcycle.

Unless you are a well-funded or well-established company, this means you are buying parts and paying for labor with money borrowed, with the hope of paying those loans off, once you make your sale. For European motorcycle manufacturers, this usually means that you are buying the parts from suppliers on credit.

As with a credit card, once it reaches its maximum, you can no longer use it. And, if you max out enough credit cards, no lender will issue you another one – at least, not at any sort of reasonable interest rate.

That is what we have here with MV Agusta – the Italian motorcycle manufacturer maxed out its credit card with the banks, and it maxed out its credit card with suppliers. In order to use those lines of credit again, MV Agusta will need to pay down the amount of money that it owes.

Normally, when a company takes on debt, it factors in a payback schedule – in the same way that your credit card company has a “minimum payment” amount on each statement it sends you. The minimum payment is based on how much you owe the credit card company, so by definition it is based your past purchases.

If you are savvy, you will factor in future purchases as well, usually taking previous spending habits into account – i.e. if you know you are going to spend $500 next month on your credit card for groceries or whatever, you make sure you pay down your card enough this month, so you can make those purchases next month.

Where this becomes tricky though is when the rate of spending outstrips this payback amount – i.e. your groceries were $500 this month, but next month you have a house guest or something, and your spending goes up to $1,000 or more.

In the case of MV Agusta, the rapid sales growth meant that the money it was paying back to its lenders wasn’t enough to keep its credit lines free and clear, as it was spending at a higher rate than what it was earning, at window of time – remember there is that 12 to 18-month delay before the profit is realized.

This is called a cash flow problem. As far as business problems go, there are worse ones to have (especially if you are spending money to make money)…unless your name happens to be MV Agusta, of course.

The Poison Pill

Remember that €15 million loan from the Italian bank? Well it came with a catch.

One of the covenants to the deal with SACE and BPM was that AMG would have to remain as at least a 20% equity holder in MV Agusta, otherwise the bank could demand their money back. Immediately.

This covenant is a testament to how much these banks valued AMG’s involvement in MV Agusta, but it is also a critical factor in the predicament that MV Agusta currently faces, as it puts Giovanni Castiglioni between a rock and a hard place with his choices.

It also means, that the departure of AMG from MV Agusta would be a wrecking ball on the motorcycle company.

The Rock and the Hard Place

Cash flow problems are typically solved with some sort of bridge loan, where a lender “bridges” the gap between the money you need right now, to the money you are earning down the road.

A bridge loan is usually fairly straight forward, especially if you are a company that is seeing a hockey stick on its sales graph. Booming sales speak for themselves, after all.

However, if you are a company that is known for going bankrupt, having a revolving door of ownership, and racking up considerable amounts of debt on its financial statements, getting a bridge loan is a very tough proposition.

Back to the credit card analogy, you are asking another credit card company for a card, when you already have a bunch of maxed out cards in your wallet. It just doesn’t happen.

There is a second way to get money though, and that is through an equity partner. This would mean another company taking part-ownership of MV Agusta, in exchange for a cash infusion.

In the case of MV Agusta, with €40 million in liabilities, a roughly fair equity investor would want close to a 45% stake in the motorcycle company, in exchange for wiping the debt clean.

In a more likely reality, an equity partner would be looking to take control of the company, with over a 51% ownership play in that situation, to make the deal worth their while and to protect their investment.

At the most basic level for structuring such a deal of this size, this would mean that AMG’s position in MV Agusta would be diluted below that 20% threshold.

In fact, any meaningful amount of money invested into MV Agusta as equity (as opposed to debt), would likely take AMG below the 20% mark, which as we mentioned before, creates more problems for the brand, as it causes a financial avalanche on MV Agusta – the Italian motorcycle company just doesn’t have that kind of free cash available to it.

To top things all off, this would likely mean Giovanni Castiglioni would lose control of his motorcycle company.

Be sure to remember that the 35-year-old CEO literally grew up in the MV Agusta factory, and there are deep connections with the brand and Giovanni’s late father, Claudio.

For the Castiglioni family, this is as much about business as it is for them personal.

Show Me the Money

Rumors suggest that AMG is not keen on digging deeper into its Italian misadventure, nor is Castiglioni likely to give up the necessary control of MV Agusta to make that deal happen.

AMG selling its position in MV Agusta does nothing positive for the motorcycle brand, as it would still invoke the €15 million payment, not to mention put MV Agusta on even shaky ground, from a public perception perspective.

Additionally in such a scenario, it would be AMG that would be getting cash in that deal (arguably less than the €30 million it invested), not MV Agusta.

This is likely the reason why we have seen today’s announcement that MV Agusta hopes to restructure its debt with its lenders, even though no details of that plan have been put forth. The reality is, restructuring the debt is the only viable path for MV Agusta, given the interests of the parties involved, including AMG.

Working with its employee union, parts suppliers, and financial lenders, MV Agusta hopes to structure a new debt repayment plan that will allow the motorcycle company not only meet its production schedules, develop and plan for the long-term growth of the brand, but also to ensure a financially sound environment for itself and its creditors.

How that all will be achieved though, is anyone’s guess. One thing is clear though, something in the equation set out above will have to give. This is still a chicken and egg problem – which means one of that party’s positions will have to evolve from where it is now.

Photo: MV Agusta