Jaguar Land Rover Automotive plc is a subsidiary of Tata Motors Limited, an Indian company. It declared a bond issue of US$500 million, the proceeds of which would be used for more expensive outstanding bonds. This case study analyzes how the company can save on costs through financing strategies.
S. Veena Iyer
Harvard Business Review (W15332-PDF-ENG)
July 31, 2015
Case questions answered:
- What factors might have enabled Jaguar Land Rover plc to raise new debt at less than half the coupon rate of interest in 2015, compared with the debt raised in 2011?
- Compute the amount at which existing bondholders might be willing to surrender their holdings.
- Assuming JLR purchases all existing outstanding bonds at a price determined in Question 2, determine the incremental cash flows of this bond issue vis-a-vis the original issue. Does the financing strategy result in cost savings for JLR?
- What other benefits, if any, might accrue to JLR as a result of this financing strategy? Does this strategy add value to the firm? To the existing bondholders? To JLR’s equity-holders?
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Jaguar Land Rover plc: Bond Valuation Case Answers
This case solution includes an Excel file with calculations.
1. What factors might have enabled Jaguar Land Rover plc to raise new debt at less than half the coupon rate of interest in 2015, compared with the debt raised in 2011?
The factors that enabled Jaguar Land Rover plc to raise new debt at less than half the coupon rate of interest in 2015 include an upgrade of their bond rating from Ba3 to Ba2, a natural hedge for decreasing currency risk with both their dollar and pound-denominated debt, and the face value of JLR’s new issuance as well.
The issuers with higher creditworthiness can borrow at a lower rate. However, less creditworthy companies may have to pay a higher interest. Consequently, bonds with higher credit ratings would always carry lower coupon rates. And bonds with lower ratings usually have higher rates to compensate for the risk associated with the bonds.
Since Moody’s Investors Services had upgraded Jaguar Land Rover plc’s bond rating from Ba3 to Ba2, this higher credit rating would affect its coupon rate to decrease.
In this case, we can look at the coupon rate as a scale of creditworthiness. The higher the coupon rate, the higher the risk. On the other hand, the lower the coupon rate is, the higher the creditworthiness.
Currency fluctuations may impact bonds significantly. Because the currency risk may lead to the possibility of losing money due to currency volatility, JLR’s strategy of issuing both the US dollar and the European pound will reduce currency risk.
By doing this, JLR’s issuance of senior notes in two different currencies would create a natural hedge for the company by diminishing the risk. Accordingly, the coupon rate will then decrease by mitigating currency risk.
Lastly, the face value of Jaguar Land Rover plc’s new bond issuance would also be another factor that enabled the company to raise new debt at less than half the coupon rate of interest in 2015. Compared to the previous issuance in 2011, the new senior notes issuance has a face value of $500 million when it matures.
As mentioned in the case material, the previous notes signaled an 11% premium over its face value. This indicates that the bond value has…
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