Bond market signals rocky road ahead for Tata Motors, Jaguar Land Rover

JLR bonds trading at record yield of 13.2%, more than double since the pandemic broke out

The bond market is signalling a rocky road ahead for both Tata Motors and its British subsidiary, Jaguar Land Rover (JLR), as they struggle with sales. The yield on JLR bonds has more than doubled since the pandemic blew out of proportion in early March and is refusing to cool down.

JLR bonds are trading at record yield of 13.2 per cent — one of the highest in the automotive industry, nearly three times that of General Motors and 10 times that of Toyota Motor. This, the analysts said, will make it tough for JLR to raise additional funding to plug the hole in its cash flows due to plant closures. The British company has already sought a dole from the UK government worth £1 billion to tide over the financial crisis.

Analysts say if the JLR is forced to borrow at its current bond yield, its operations will be uncompetitive compared to its peers such as BMW, Mercedes Benz, Toyota, and General Motors, which have much lower funding cost.

At the current bond price, JLR will have to pay 13 per cent interest to borrow in US dollar from the bond market, while its parent, Tata Motors, will have to shell out an interest of nearly 10 per cent to borrow in USD. In contrast, there was a steady decline in yields on JLR bonds last year and averaged 6.2 per cent in 2019 calendar year.

In February, JLR shelved a plan to sell bonds to raise cash for its operations. Its financial health deteriorated due to the spread of the coronavirus disease, leading it to seek a bailout from the British government last week.

In comparison, General Motors’ borrowing cost is around 4 per cent, while it’s 3.1 per cent for Kia Motors, 1.4 per cent for Toyota Motor Corp, and BMW bonds are trading at a yield of 2.37 per cent.

Analysts say JLR may need equity support from its promoter to tide over its financial problems. International brokerage firm CLSA expects Tata Sons to make an equity infusion of Rs 6,500 crore in Tata Motors so that it can sustain its operations in FY21.

A Tata Sons spokesperson did not respond to an email query. JLR accounts for nearly three-fourth of Tata Motor’s consolidated revenues and most of its profits. CLSA expects Tata Motors passenger car business, including JLR, to have a negative free-cash flow of around Rs 40,000 crore in FY20 and FY21. In other words, the business cash burn to pay for operational costs and capex including product development is likely to exceed internal cash generation by around $5.3 billion in FY20-21.

Things are likely to improve in the next financial year and the division is expected to generate free cash flows worth around Rs 8,000 crore in FY22.

This will force the company to make additional borrowings, leading to a rise in the company's indebtedness. CLSA expects Tata Motors’ consolidated net debt to increase from Rs 28,400 crore in FY19 to around Rs 68,400 crore by the end of FY22. JLR is also under the scanner of rating agencies.

Fitch Ratings has downgraded JLR’s Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'B' from 'B+’, with a negative outlook. Fitch expects significant cash outflow from the extension of its plant closures to mid-May 2020, from the original date of April 20, combined with a sharp reduction in volumes sold, slowing the company’s recovery.

Tata Motors had acquired JLR in 2008 for $2.3 billion. In 2007, the Tata Group had taken over Corus Steel for a whopping $13 billion. Tata Steel UK has also sought a £500-million cash bailout from the British government citing disruption due to the ongoing pandemic. The British government could pick up a stake in JLR in lieu of the bailout, local media reported.