Compute the price today (assume that it is May 16 2015) if these bonds were not callable? You could use either USD ($410 million) or British pound (263 million). The exchange rate between dollar to pound is USD1.5575/1 at the end of December 2014.
JAGUAR LAND ROVER PLC: BOND VALUATION Jaguar Land Rover Automotive plc (LR), a wholly owned subsidiary of the Indian company Tata Motors Limited, announced, on March 3, 2015, an issue of Senior Notes (bonds) worth US$500 million 1 and due in 2020 at a coupon rate of 3.5 per cent per annum (p.a.), interest payable semi-annually. The networoceeds of this issue were to be primarily applied to repurchase the company's outstanding Senior Notes worth $410 million, issued on May 19, 2011, and due on May 15, 2021(see Exhibit 1). These outstanding Notes carried a coupon rate of interest of 8.125 per cent p.a., payable two times per year.2 In March 2015, the indicative pricing of these Notes in the Luxemburg Bourse signaled an 11 per cent premium over face value (see Exhibit 2). The reference treasury security for these Notes was the U.S. Treasury Notes due May 15, 2016, that carried a coupon of 0.25 per cent p.a. (see Exhibit 3). This issue was the company's second such refinancing in two months. The bond buyback was to be through a tender offer starting immediately and ending on March 30, 2015. Existing bondholders had an option to sell their holdings to the company or roll over their existing holdings to the new security.3 No company would forego such an opportunity to have its interest expenses and improve its bottom line. But can such a simple, positive-sum game exist in an efficient market? JAGUAR LAND ROVER PLC The 2008 financial meltdown in the United States proved especially cruel to the auto sector companies. As part of its corporate survival, revival and restructuring strategy, Ford Motor Company sold its Jaguar and Land Rover brands to Tata Motors Ltd., an Indian automobile manufacturing company on June 2, 2008, for a net consideration of $2.3 billion4 (approximately GBP1.47 billion).5 The volumes of these brands saw a 32 per cent drop in the 10 months after the takeover, and JLR posted a net loss of GBP402.4 million for the period ending March 31, 2009.6 By fiscal year (FY) 2011, however, the company had managed a turnaround and posted a post-tax profit of GBP1.035.90 million.7 In 2011/12, JLR issued both dollar-denominated and pound-denominated debt to fund investments in its U.S. and European businesses respectively. This multi-currency funding also helped JLR to create a natural hedge for mitigating currency risk.8 The next four years saw JLR turning into the cash cow that supported the parent company in the face of a lackluster performance in the latter's domestic market. For the year ended March 31, 2014, JLR comprised more than 80 per cent of the consolidated automobile sales revenue for Tata Motors and was solely responsible for the consolidated company posting operating profits (see Exhibit 4).9 By September 2013, ratings agency Moody's Investors Service had upgraded JLR's bond issues from Ba3 to Ba2 with a stable outlook. Besides the impressive volume and revenue growth as well as earnings before interest, tax, depreciation and amortization (EBITDA) margins posted by JLR, the ratings upgrade was attributable to the company's positive free cash flows in FY2013 despite increased capital expenditures (capex) and dividend payments (see Exhibit 5). Another important factor contributing to this ratings upgrade was JLR's conservative financial strategy in terms of leverage and comfortably spread-out bond repayments (see Exhibits 1 and 6). 10 Analysts at Moody's, however, expected the next few years to see free cash flows turning negative on the back of increased capital investment and research and development. Both Standard and Poor's and Moody's rating services maintained JLR's credit rating at BB and Ba2 respectively, while revising their outlooks to positive" in late 2014.11 With a capex of GBP3.6 billion to GBP3.8 billion lined up for FY2016, the chief financial officer of Tata Motors was quoted as saying the company was cautiously optimistic about cash flow in JLR next year."12 It was evident that JLR wanted to benefit from the impressive turnaround in its fundamentals. But would efficient bond markets allow firms to reap such benefits? Who gains and who pays in such deals? EXHIBIT 1: JAGUAR LAND ROVER'S FINANCING ARRANGEMENTS AS AT DECEMBER 31, 2014 Facility amount Annual Rate of interest Outstanding Undrawn GBP millions A. Senior Notes GBP500m due 2020 (first call Mar 2016) GBP400m due 2022 US$410m due 2021 (first call May 2016) US$500m due 2023 (first call Feb 2018) US$700m due 2018 US$500m due 2019 B. Revolving 3- and 5-year credit C. Receivable factoring facilities Total 500 400 263 321 450 321 1,485 225 3,965 8.250% 5.000% 8.125% 5.625% 4.125% 4.250% 500 400 263 321 450 321 0 0 0 0 0 0 1,485 32 1,517 193 2,448 Note: GBP = British pound sterling. The company has used the GBP/US$ exchange rate prevailing on the balance sheet date in its annual and interim financial statements to convert the USS-denominated debt to GBP 13 Since the company earns approximately 17% of its revenue each in the United Kingdom and North America, for the purposes of this case, we assume that the natural hedge created mitigates any exchange-rate risk. The average GBP/US$ rate for March 2015 can be taken at 1.50.14 Source: Jaguar Land Rover plc FY2015, Q3 Interim Accounts, p. 6, www.jaguarlandrover.com/media/59285/fy15-93-ifrs-interim-accounts-final.pdf, accessed March 13, 2015. EXHIBIT 2: JAGUAR LAND ROVER'S OUTSTANDING BONDS AND NOTES ON LUXEMBOURG BOURSE Coupon Rate; Security Start/End Dates 3.5%; USG5002FAE63 3.5%; US47010BAE48 3.875%, XS1195502031 3.875%, XS1195503351 8.125%; USG50027AB03 8.125%; US47009XAB55 8.25%, XS0765386627 8.25%, XS0765386973 06/03/201515/03/2020 06/03/201515/03/2020 24/02/2015-01/03/2023 24/02/2015-01/03/2023 19/05/2011-15/05/2021 19/05/201115/05/2021 27/03/201215/03/2020 27/03/201215/03/2020 Last Traded Date Price 12/03/2015 100 % 12/03/2015 1001% 06/03/2015 100 i % 06/03/2015 1001% 04/02/2015 111.2761 % 07/08/2014 111.5831% 30/01/2015 110.944 1 % 30/01/2015 111.1821% Note: The suffix l' in the last column stands for "indicative price, " also called "no-trade price." This is used when no trades have happened in the security the previous day. EXHIBIT 3: YIELD CURVE FOR THE U.S. TREASURY - MAY 16, 2011 VERSUS MARCH 16, 2015 5.00% 4.00% 3.00% 1.83 % 52.00% 1.57% 1.00% 1 MO SMO 6MO TYR 2YR 3YR SYR 7YR 10YR 20YR 30YR Maturity (Note: Primary axis is not to scale) 3/16/2015 -5/16/2011 EXHIBIT 4: JAGUAR LAND ROVER INCOME STATEMENTS, 2012-2015 Figures in GBP millions Revenue Material and other cost of sales Employee cost Other expenses Development costs capitalized Other income Depreciation &amortization Foreign exchange gain/ (loss) Finance income Finance expenses (net) Share of loss from joint ventures Profit before tax Income tax expense Profit after tax FY2012 FY2013 FY2014 13,512 15,784 19,386 (8,733) (9,904) (11,904) (1,039) (1,334) (1,654) (2,529) (3,075) (3,717) 751 860 1,030 37 70 153 (465) (622) (875) 14 (109) 236 16 34 38 (85) (18) (185) (12) (7) 1,479 1,674 2,501 (19) (460) (622) 1,460 1,214 1,879 FY2015-9 months 16,040 (9,768) (1,427) (2,941) 850 150 (743) 58 36 (13) (24) 2,218 (482) 1,736 Note: GBP = British pound sterling; FY = fiscal year Source: Jaguar Land Rover plc Annual Report 2013/14, p. 104, www.jaguarlandrover.com/media/23108/annual-report-2014.pdf, FY2015, Q3 Interim (unaudited) accounts, p. 7, www.jaguarlandrover.com/media/59285/fy15-93-ifrs-interim-accounts-final.pdf, both accessed March 13, 2015. EXHIBIT 5: JAGUAR LAND ROVER'S CASH FLOW STATEMENTS, 2012-2015 FY 2012 1,460 FY 2013 1,214 FY 2014 1,879 FY2015-9 months 1,736 743 466 69 96 622 (16) 475 875 100 577 (23) 610 Figures in GBP millions Profit for the year Adjustments for: Depreciation & Amortization Finance expenses/ (income) Others Cash flows from operations before working capital adjustments Net cash generated from operations Investment in joint ventures Investment in property, plant and equipment Cash paid for intangible assets Cash used for other investments Net cash used for investing activities Finance expenses and fees paid Proceeds from short-term debt Repayment of short-term debt Proceeds from long-term debt Repayment of long-term debt Payment of lease obligations Dividends paid Net cash used generated from financing activities Net change in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 2,091 2,500 (1) (596) (814) (131) (1,542) (128) 105 (655) 1,500 (374) (4) 2.295 3,431 2,429 3.422 (71) (92) (891) (1,201) (958) (1,155) (689) (288) (2,609) (2,736) (179) (269) 88 1 (250) (158) 317 829 (746) (4) (5) (150) (150) (178) (498) (358) 188 3,066 2,572 (124) (1,147) (885) 131 (2,025) (97) 21 (6) 313 444 1,402 (150) 77 624 1,028 2,430 2,430 2,072 2,072 2,260 2,260 2,884 Note: GBP = British pound sterling, FY = fiscal year Source: Jaguar Land Rover plc Annual Report 2013/14, p. 106, FY2015, Q3 Interim (unaudited) accounts, p. 10, www.jaguarlandrover.com/media/59285/fy 15-93- ifrs-interim-accounts-final.pdf, accessed March 13, 2015. JAGUAR LAND ROVER PLC: BOND VALUATION Jaguar Land Rover Automotive plc (LR), a wholly owned subsidiary of the Indian company Tata Motors Limited, announced, on March 3, 2015, an issue of Senior Notes (bonds) worth US$500 million 1 and due in 2020 at a coupon rate of 3.5 per cent per annum (p.a.), interest payable semi-annually. The networoceeds of this issue were to be primarily applied to repurchase the company's outstanding Senior Notes worth $410 million, issued on May 19, 2011, and due on May 15, 2021(see Exhibit 1). These outstanding Notes carried a coupon rate of interest of 8.125 per cent p.a., payable two times per year.2 In March 2015, the indicative pricing of these Notes in the Luxemburg Bourse signaled an 11 per cent premium over face value (see Exhibit 2). The reference treasury security for these Notes was the U.S. Treasury Notes due May 15, 2016, that carried a coupon of 0.25 per cent p.a. (see Exhibit 3). This issue was the company's second such refinancing in two months. The bond buyback was to be through a tender offer starting immediately and ending on March 30, 2015. Existing bondholders had an option to sell their holdings to the company or roll over their existing holdings to the new security.3 No company would forego such an opportunity to have its interest expenses and improve its bottom line. But can such a simple, positive-sum game exist in an efficient market? JAGUAR LAND ROVER PLC The 2008 financial meltdown in the United States proved especially cruel to the auto sector companies. As part of its corporate survival, revival and restructuring strategy, Ford Motor Company sold its Jaguar and Land Rover brands to Tata Motors Ltd., an Indian automobile manufacturing company on June 2, 2008, for a net consideration of $2.3 billion4 (approximately GBP1.47 billion).5 The volumes of these brands saw a 32 per cent drop in the 10 months after the takeover, and JLR posted a net loss of GBP402.4 million for the period ending March 31, 2009.6 By fiscal year (FY) 2011, however, the company had managed a turnaround and posted a post-tax profit of GBP1.035.90 million.7 In 2011/12, JLR issued both dollar-denominated and pound-denominated debt to fund investments in its U.S. and European businesses respectively. This multi-currency funding also helped JLR to create a natural hedge for mitigating currency risk.8 The next four years saw JLR turning into the cash cow that supported the parent company in the face of a lackluster performance in the latter's domestic market. For the year ended March 31, 2014, JLR comprised more than 80 per cent of the consolidated automobile sales revenue for Tata Motors and was solely responsible for the consolidated company posting operating profits (see Exhibit 4).9 By September 2013, ratings agency Moody's Investors Service had upgraded JLR's bond issues from Ba3 to Ba2 with a stable outlook. Besides the impressive volume and revenue growth as well as earnings before interest, tax, depreciation and amortization (EBITDA) margins posted by JLR, the ratings upgrade was attributable to the company's positive free cash flows in FY2013 despite increased capital expenditures (capex) and dividend payments (see Exhibit 5). Another important factor contributing to this ratings upgrade was JLR's conservative financial strategy in terms of leverage and comfortably spread-out bond repayments (see Exhibits 1 and 6). 10 Analysts at Moody's, however, expected the next few years to see free cash flows turning negative on the back of increased capital investment and research and development. Both Standard and Poor's and Moody's rating services maintained JLR's credit rating at BB and Ba2 respectively, while revising their outlooks to positive" in late 2014.11 With a capex of GBP3.6 billion to GBP3.8 billion lined up for FY2016, the chief financial officer of Tata Motors was quoted as saying the company was cautiously optimistic about cash flow in JLR next year."12 It was evident that JLR wanted to benefit from the impressive turnaround in its fundamentals. But would efficient bond markets allow firms to reap such benefits? Who gains and who pays in such deals? EXHIBIT 1: JAGUAR LAND ROVER'S FINANCING ARRANGEMENTS AS AT DECEMBER 31, 2014 Facility amount Annual Rate of interest Outstanding Undrawn GBP millions A. Senior Notes GBP500m due 2020 (first call Mar 2016) GBP400m due 2022 US$410m due 2021 (first call May 2016) US$500m due 2023 (first call Feb 2018) US$700m due 2018 US$500m due 2019 B. Revolving 3- and 5-year credit C. Receivable factoring facilities Total 500 400 263 321 450 321 1,485 225 3,965 8.250% 5.000% 8.125% 5.625% 4.125% 4.250% 500 400 263 321 450 321 0 0 0 0 0 0 1,485 32 1,517 193 2,448 Note: GBP = British pound sterling. The company has used the GBP/US$ exchange rate prevailing on the balance sheet date in its annual and interim financial statements to convert the USS-denominated debt to GBP 13 Since the company earns approximately 17% of its revenue each in the United Kingdom and North America, for the purposes of this case, we assume that the natural hedge created mitigates any exchange-rate risk. The average GBP/US$ rate for March 2015 can be taken at 1.50.14 Source: Jaguar Land Rover plc FY2015, Q3 Interim Accounts, p. 6, www.jaguarlandrover.com/media/59285/fy15-93-ifrs-interim-accounts-final.pdf, accessed March 13, 2015. EXHIBIT 2: JAGUAR LAND ROVER'S OUTSTANDING BONDS AND NOTES ON LUXEMBOURG BOURSE Coupon Rate; Security Start/End Dates 3.5%; USG5002FAE63 3.5%; US47010BAE48 3.875%, XS1195502031 3.875%, XS1195503351 8.125%; USG50027AB03 8.125%; US47009XAB55 8.25%, XS0765386627 8.25%, XS0765386973 06/03/201515/03/2020 06/03/201515/03/2020 24/02/2015-01/03/2023 24/02/2015-01/03/2023 19/05/2011-15/05/2021 19/05/201115/05/2021 27/03/201215/03/2020 27/03/201215/03/2020 Last Traded Date Price 12/03/2015 100 % 12/03/2015 1001% 06/03/2015 100 i % 06/03/2015 1001% 04/02/2015 111.2761 % 07/08/2014 111.5831% 30/01/2015 110.944 1 % 30/01/2015 111.1821% Note: The suffix l' in the last column stands for "indicative price, " also called "no-trade price." This is used when no trades have happened in the security the previous day. EXHIBIT 3: YIELD CURVE FOR THE U.S. TREASURY - MAY 16, 2011 VERSUS MARCH 16, 2015 5.00% 4.00% 3.00% 1.83 % 52.00% 1.57% 1.00% 1 MO SMO 6MO TYR 2YR 3YR SYR 7YR 10YR 20YR 30YR Maturity (Note: Primary axis is not to scale) 3/16/2015 -5/16/2011 EXHIBIT 4: JAGUAR LAND ROVER INCOME STATEMENTS, 2012-2015 Figures in GBP millions Revenue Material and other cost of sales Employee cost Other expenses Development costs capitalized Other income Depreciation &amortization Foreign exchange gain/ (loss) Finance income Finance expenses (net) Share of loss from joint ventures Profit before tax Income tax expense Profit after tax FY2012 FY2013 FY2014 13,512 15,784 19,386 (8,733) (9,904) (11,904) (1,039) (1,334) (1,654) (2,529) (3,075) (3,717) 751 860 1,030 37 70 153 (465) (622) (875) 14 (109) 236 16 34 38 (85) (18) (185) (12) (7) 1,479 1,674 2,501 (19) (460) (622) 1,460 1,214 1,879 FY2015-9 months 16,040 (9,768) (1,427) (2,941) 850 150 (743) 58 36 (13) (24) 2,218 (482) 1,736 Note: GBP = British pound sterling; FY = fiscal year Source: Jaguar Land Rover plc Annual Report 2013/14, p. 104, www.jaguarlandrover.com/media/23108/annual-report-2014.pdf, FY2015, Q3 Interim (unaudited) accounts, p. 7, www.jaguarlandrover.com/media/59285/fy15-93-ifrs-interim-accounts-final.pdf, both accessed March 13, 2015. EXHIBIT 5: JAGUAR LAND ROVER'S CASH FLOW STATEMENTS, 2012-2015 FY 2012 1,460 FY 2013 1,214 FY 2014 1,879 FY2015-9 months 1,736 743 466 69 96 622 (16) 475 875 100 577 (23) 610 Figures in GBP millions Profit for the year Adjustments for: Depreciation & Amortization Finance expenses/ (income) Others Cash flows from operations before working capital adjustments Net cash generated from operations Investment in joint ventures Investment in property, plant and equipment Cash paid for intangible assets Cash used for other investments Net cash used for investing activities Finance expenses and fees paid Proceeds from short-term debt Repayment of short-term debt Proceeds from long-term debt Repayment of long-term debt Payment of lease obligations Dividends paid Net cash used generated from financing activities Net change in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 2,091 2,500 (1) (596) (814) (131) (1,542) (128) 105 (655) 1,500 (374) (4) 2.295 3,431 2,429 3.422 (71) (92) (891) (1,201) (958) (1,155) (689) (288) (2,609) (2,736) (179) (269) 88 1 (250) (158) 317 829 (746) (4) (5) (150) (150) (178) (498) (358) 188 3,066 2,572 (124) (1,147) (885) 131 (2,025) (97) 21 (6) 313 444 1,402 (150) 77 624 1,028 2,430 2,430 2,072 2,072 2,260 2,260 2,884 Note: GBP = British pound sterling, FY = fiscal year Source: Jaguar Land Rover plc Annual Report 2013/14, p. 106, FY2015, Q3 Interim (unaudited) accounts, p. 10, www.jaguarlandrover.com/media/59285/fy 15-93- ifrs-interim-accounts-final.pdf, accessed March 13, 2015
