Lordstown Motors buys itself some time with rescue deal
Lordstown Motors just announced an apparent rescue deal in a gambit that layers more financial engineering into the pre-revenue electric truck maker that last year merged with a SPAC.
Catch up quick: The company is now under federal investigation for misleading investors about its preorders, and in June it said it may not be able to begin vehicle production or continue as a going concern.
Driving the news: Yorkville Advisors on Monday committed to purchase up to $400 million in Lordstown stock over the next three years, from time to time, when Lordstown asks it to.
- Yorkville appears to be an intermediary here, with designs on selling the shares to other investors (the release notes that the fund can sell them even before taking possession of them).
Why it matters: Lordstown isn’t working with an investment bank on a traditional or at-the-market equity offering. Given its financial distress and potential legal troubles, that’s not a good sign.
- As RBC analyst Joseph Spak wrote in a research note Monday, it’s a “seeming indication that a traditional underwritten deal is not an option right now.”
- Bloomberg Opinion’s Matt Levine adds that an investment bank could get “very sued” if it sold Lordstown shares to investors and Lordstown then got in trouble with regulators and couldn’t continue as a going concern.
Context: Usually when investment banks or brokers help distressed companies raise capital, they do it on a “best efforts” basis. That means if the bankers can’t raise the money from investors, they can shrug and say “I tried” — and walk away. They’re not on the hook for the funds.
- “It takes a big stomach for risk to commit to buy that much stock from a company with a reputation for performance and candor like Lordstown’s,” Erik Gordon, a professor at the University of Michigan’s Ross School of Business, tells the Pittsburgh Post-Gazette.
The big picture: Given all this, the signaling isn’t great. And Lordstown’s shareholders seem to know it. The stock's Tuesday close ($6.95) was down 15% from Monday morning.
The bottom line: The funding will help, but Lordstown still needs more money. A lot more.
- The best-case scenario is that the deal with Yorkville helps the EV maker attract more funding from other sources.
- Spak estimates in his note that the company needs more than $2 billion over the next four years to stay solvent — and that's assuming lower delivery targets than the company's forecast.