JAGUAR LAND ROVER PLC: BOND VALUATION

Jaguar Land Rover Automotive plc (JLR), 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 million¹ and due in 2020 at a coupon rate of 3.5 per cent per annum (p.a.), interest payable semi-annually. The net proceeds 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 halve 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 restore 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

EXHIBIT 2: JAGUAR LAND ROVER'S OUTSTANDING BONDS AND NOTES ON LUXEMBOURG BOURSE Coupon Rate; Security Start/End Dates Last Traded Date Price 3.5%; USG5002FAE63 06/03/2015-15/03/2020 12/03/2015 100 1 % 3.5%; US47010BAE48 06/03/2015-15/03/2020 12/03/2015 100 i % 3.875%; XS 1 195502031 24/02/2015-01/03/2023 06/03/2015 100 1 % 3.875%; XS 1 195503351 24/02/2015-01/03/2023 06/03/2015 100 i % 8.125%; USG50027AB03 19/05/2011-15/05/2021 04/02/2015 111.276 1 % 8. 125%; US47009XAB55 19/05/2011-15/05/2021 07/08/2014 111.583 1 % 8.25%; XS0765386627 27/03/2012-15/03/2020 30/01/2015 110.944 1 % 8.25%; XS0765386973 27/03/2012-15/03/2020 30/01/2015 111. 182 1 %EXHIBIT 3: YIELD CURVE FOR THE U.S. TREASURY - MAY 16, 2011 VERSUS MARCH 16, 2015 5.00% 4.00% 3.00% Yield % 2.00% 1.83% 1.00% 1.57 % 0.00% 1MO 3MO 6MO 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR Maturity (Note: Primary axis is not to scale) 3/16/2015 5/16/2011EXHIBIT 4: JAGUAR LAND ROVER INCOME STATEMENTS, 20122015 Figures in GBP millions FY2012 FY2013 FY2014 FY2015-9 months Revenue 13,512 15,784 19,386 16,040 Material and other cost of sales (8,733) (9,904) (11,904) (9,768) Employee cost (1,039) (1,334) (1,654) (1,427) Other expenses (2,529) (3,075) (3,717) (2,941) Development costs capitalized 751 860 1,030 850 Other income 37 70 153 150 Depreciation &amortization (465) (622) (875) (743) Foreign exchange gain! (loss) 14 (109) 236 58 Finance income 16 34 38 36 Finance expenses (net) (85) (18) (185) (13) Share of loss from joint ventures (12) (7) (24) Profit before tax 1,479 1,674 2,501 2,218 Income tax expense (19) (460) (622) (482) Profit after tax 1,460 1,214 1,879 1,736 EXHIBIT 5: JAGUAR LAND ROVER'S CASH FLOW STATEMENTS, 20122015 FY FY FY FY2015-9 Figures in GBP millions 2012 2013 2014 months Prot for the year 1,460 1,214 1,879 1,736 Adjustments for: Depreciation & Amortization 455 522 375 743 Finance expenses! (income) 69 (16) 100 (23) Others 96 475 577 610 Cash ows from operations before working capital adjustments 2,091 2,295 3,431 3,055 Net cash generated from operations 2,500 2,429 3,422 2,572 Investment in joint ventures (1) (71) (92) (124) Investment in property, plant and equipment (596) (891) (1,201) (1,147) Cash paid for intangible assets (814) (958) (1,155) (885) Cash used for other investments (131) (689) (288) 131 Net cash used for investing activities (1,542) (2,609) (2,736) (2,025) Finance expenses and fees paid (128) (179) (269) (97) Proceeds from short-tenn debt 105 88 1 21 Repayment of short-term debt (655) (250) (158) (6) Proceeds from long-term debt 1,500 317 829 313 Repayment of long-term debt (374) (746) Payment of lease obligations (4) (4) (5) (4) Dividends paid (150) (150) (150) Net cash usedlgenerated from nancing activities 444 (178) (498) 77 Net change in cash and cash equivalents 1,402 (358) 188 624 Cash and cash equivalents at the beginning of the year 1,028 2,430 2,072 2,260 Cash and cash equivalents at the end of the year 2,430 2,072 2,260 2,884 EXHIBIT 6: JAGUAR LAND ROVER BALANCE SHEETS, 2012-2015 FY2015-9 Figures in GBP millions FY2012 FY2013 FY2014 months Property, plant &equipment 1,586 2,335 3, 184 4,137 Intangible assets 2,801 3,522 4,240 4,769 Other non-current assets 595 771 935 817 Total non-current assets 4,982 6,628 8,359 9,723 Cash &cash equivalents 2,430 2,072 2,260 2,884 Short-term deposits 775 1,199 1, 143 Trade receivables 662 927 831 879 Inventories 1,497 1,795 2, 174 2,238 Other current assets 646 640 766 662 Total current assets 5,235 6,209 7,230 7,806 Total Assets 10,217 12,837 15,589 17,529 Accounts payable 3,285 4,227 4,787 4,699 Short-term borrowings and current portion of long-term debt 490 328 167 193 Provisions &other current liabilities 1,266 1,442 1, 180 1,461 Total current liabilities 5,041 5,997 6, 134 6,353 Long-term debt 1,484 1,839 1,843 2,230 Provisions 344 468 582 638 Retirement benefit obligations 327 657 674 743 Other non-current liabilities 97 337 492 768 Total non-current liabilities 2,252 3,301 3,591 4,379 Total Liabilities 7,293 9,298 9,725 10,732 Ordinary share capital 1,501 1,501 1,501 1,501 Reserves and surplus 1,423 2,038 4,363 5,296 Equity attributable to shareholders 2,924 3,539 5,864 6,797 Total Liability and Equity 10,217 12,837 15,589 17,529Facility Annual Rate GBP millions amount of interest Outstanding Undrawn A. Senior Notes GBP500m due 2020 (first call Mar 2016) 500 8.250% 500 GBP400m due 2022 400 5.000% 400 US$410m due 2021 (first call May 2016) 263 8.125% 263 ooo OOO US$500m due 2023 (first call Feb 2018) 321 5.625% 321 US$700m due 2018 450 4. 125% 450 US$500m due 2019 321 4.250% 321 B. Revolving 3- and 5-year credit 1,485 1,485 C. Receivable factoring facilities 225 193 32 Total 3,965 2,448 1,517