The Jaguar Land Rover PLC: Bond Valuation

Synopsis

Jaguar Land Rover, plc (JLR) announced two Senior Notes (bonds) issues in early 2015; the primary purpose of the bond issues was to replace their existing debt with new debt that was available at less than half the original rates of interest. Students will analyze whether this common financial management strategy adopted by many companies is indeed beneficial to the firm or its stakeholders, or both. Students are also challenged to determine the specific situations when this strategy can be justified.

This case is relatively short and designed to drive home the fundamental point that the value of an asset is the present value of its future cash flows at the prevailing market yield and that in efficient markets a firm does not stand to gain by shifting to cheaper debt. Most textbook examples and cases demonstrating the inverse relationship between yield and bond prices assume that a change in the market yield has led to change in the coupon rates for new issues. An interesting aspect of this case is that the substantial reduction in JLRs credit worthiness, thereby employing a change in the companys fundamental standing In such a scenario, does the firm benefit by replacing expensive debt with cheaper debt?

The case is to introduce students to the basics of bond valuation.

There has been some inquiry regarding the Jaguar case so I decided to send some additional narrative. The issue of the case is Tata (Jaguar) is refunding the existing bonds 8.125% with the new issue of 3.5% since they are semi those interest rates are divided by 2 for the semi annual interest rate. The original bond was $410 US with a GBP faculty amount of 263,000 GBP. The spreadsheet uses the PV function of excel to determine the faculty amount of the new bond at 333,168 (again a $500M issue bond but again in GBP. (the 328,317 if you apply 12 remaining payments). So........ from there complete the spreadsheet to determine the coupon payments for the original 263,000 GBP it will be 10,684, this is used in the PV calculation to solve for the PV of new bond the interest payments will be 5,833 on the new bond (333,168) at 3.5%. The spreadsheet defaults to USD but should be a GBP just us a general number. The only issue is the new bond will start on March 31 while the current bond is May 31, there is a clean dirty price issue here you can ignore just use the 13 remaining payments. (same as used in the spreadsheet to determine the PV of the new bond issue). There will be some residual value different you can ignore that in your assessment.

The case from there is just a narrative on what they should do, keep in mind to consider Exhibit 2 where the bond is priced at 111.583 a result of the change in interest rates. From there your narrative can be based it will not use the change in the 5 year interest rates since the rate change has been negligible so..... it will be on the credit quality of Tata.

Questions:

1. What factors might have enabled JLR to raise new debt at less than half the coupon rate of interest in 2015, compared with the debt raise in 2011.