With an improved credit rating and strong demand for high-yield bonds, the time was right for Anglo-Indian car manufacturer Jaguar Land Rover to drive through a tender offer to replace expensive debt.
When Tata Motors bought Jaguar Land Rover (JLR) for $2.3bn in 2008, many motor experts thought the Indian conglomerate had taken a step too far. Since then, the sceptics have been proved very wrong. The company delivered £2.5bn ($3.69bn) of pre-tax profit in 2014, thousands of jobs have been created and its cars are in demand across the world.
The strong recovery has been mirrored by a steady improvement in JLR’s credit rating. In 2011, the company was rated B+ by Standard & Poor’s and B1 by Moody’s. Since then, JLR has been upgraded twice, so it is now rated a respective BB and Ba2 by the two agencies, both with a positive outlook.
Such upgrades would have reduced JLR’s cost of capital, even if the market had remained stable over the past four years. But recent benign conditions and growing investor interest in non-investment-grade paper have combined to create an auspicious environment for high-yield issuance.
Against this backdrop, JLR treasurer Ben Birgbauer considered the time was right to refinance some expensive outstanding debt. In 2011, the company had issued a $410m, 10-year bond with a coupon of 8.125% and followed this in 2012 with a £500m, eight-year bond, priced at 8.25%. Both had call options in 2016.
“Since the existing bonds had call options coming up next year, we had already begun to evaluate whether and when to refinance them. Given strong conditions in the secondary market, we decided to launch a sterling refinancing,” says Mr Birgbauer.
Tender offer
The refinancing took the form of an eight-year bond at a coupon of just 3.875%, launched in conjunction with a tender offer for the 2012 issue. The deal was extremely well received, so much so that the size was increased from £350m to £400m. Emboldened by the success of the sterling transaction, JLR decided to launch a similar deal in dollars less than two weeks later. “We followed the sterling issue with a $500m, five-year bond issued at 3.5% in conjunction with a tender offer for the $410m bond,” says Mr Birgbauer.
“We had a strategy to refinance our existing bonds some time between now and the call dates in 2016. As market conditions were good, we went ahead and pulled the trigger on the sterling issue. And seeing how well that was received, we then decided to pull the trigger on the dollar issue,” he adds.
The dollar transaction also piqued the interest of a wide range of yield-hungry investors. “We saw strong demand from a mixture of traditional non-investment grade investors and, increasingly, crossover investors from the investment-grade space. We like to think that reflects a vote of confidence in our financial results and our business plans,” says Mr Birgbauer.
JLR mandated eight bookrunners on the sterling deal and 10 on the dollar transaction. The UK appointees were Deutsche Bank, BNP Paribas, Goldman Sachs, RBS, Lloyds, ING, Crédit Agricole and Société Générale, while the US transaction was run by JPMorgan Chase, Bank of America Merrill Lynch, Citi, Credit Suisse, Morgan Stanley, HSBC, Standard Chartered, ANZ, Barclays and UBS.
“We have a strong banking group of 28 banks and we try to rotate our bookrunners among members of the group with debt capital markets franchises,” says Mr Birgbauer.
A coupon halved
JLR has become a relatively frequent visitor to the capital markets since its first 2011 bond. As such, the company did not feel the need to conduct a full roadshow this time round, relying instead on conference calls with the investment community. The calls did the trick. Both bonds were priced at the tight end of initial price talks and were comfortably oversubscribed.
“We were very happy with the transactions. Each of the older deals had coupons of more than 8%. Now we have issued two transactions with coupons of below 4%. We have also extended our maturity profile as the original deals matured in 2020 and 2021, and the new deals mature in 2020 and 2023,” says Mr Birgbauer.
The extended maturity profile is particularly beneficial as JLR is investing heavily in its operations and is keen to reduce onerous capital market commitments in the short term. “We have been undertaking a significant investment programme to grow the business so we have generally been trying to set maturity dates for our debt further out to have a clear runway, without significant debt maturities for the next couple of years,” says Mr Birgbauer.
“We have no specific plans to return to the market but we are a growing company so we are always monitoring the market and we try to access it in an opportunistic fashion.”
