DBM310: Corporate Financial Management

Graduate School of Business

University of St. La Salle Bacolod City September 27, 2019

Baylosis, Michael V.
Gustilo, Dante Jr. D.

CASE 5: Jaguar Land Rover PLC: Bond Valuation

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

> JLR was able to raise new debts at less than half the coupon rate can be attributed to the following factors:
a. Moody’s Investors Services had upgraded JLR’s bond issue from Ba3 to Ba2 which reflects a ‘stable’ outlook;
b. JLR’s issuance of debt to fund investments in two different currencies (dollar- denominated and pound-denominated debt) allows JLR to create a natural hedge for
mitigating currency risk;
c. The length of when the first issuance will mature can also be a possible factor.
d. Lastly, it could be the face value of the new issuance. Compared to the previous issuance, the new issuance has a face value of $500 million, which means that when it matures, the
amount is $500 million. Also, computing the present value of the new issuance at previous issuance’s interest rate, the PV is $336 million, which is lower than the amount to be paid
for the issuance ($410 million)

2. Compute the amount at which existing bondholders might be willing to surrender their holdings?
> Assuming all bondholders are willing to receive a lump sum, then:

PV = CI (1-(1+i/m)^-n*m)/i/m) + M (1+i/m)^n*m
= 16.65 (10.7395) + 410 (0.8121)
PV = $ 511.76 Million PV= GBP 341.17 Million (at GBP/USD= 1.5)

3. Assuming JLR purchase all existing outstanding bonds at the price worked out in Q2; work out the incremental cash flows of this bond issue vis-a-vis the original issue. Does this financing
strategy result in cost savings for JLR?

> Supporting computation, please refer to: Table 1. Valuation of Cash Flow of Old Bond Investment with supporting amortisation presented in Table 2. Amortisation of Old Bond
Investment. Table 3 provides information on the valuation of net cash flow between old and new bond.
 4. 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?

> Increasing the fund means allowing Jaguar’s R&D to utilised more resources, which can be considered as an advantage to the business given the highly competitive industry. The very
efficient free cash flow of Jaguar can land them a good rating from any rating agency (e.g. Moody’s) which in effect, more potential investor for the business. Lastly, this decision can help the
business minimise risk and debt in the future.

Supporting Computation:

Table 1. Valuation of Cash Flow of Old Bond Investment

2015 2016 2017 2018 2019 2020 2021

Interest 16,656,250 16,656,250 16,656,250 16,656,250 16,656,250 16,656,250 16,656,250 16,656,250 16,656,250 16,656,250 16,656,250 16,656,250 16,656,250

Principal 0 0 0 0 0 0 0 0 0 0 0 0 410,000,000

Total cash 16,656,250 16,656,250 16,656,250 16,656,250 16,656,250 16,656,250 16,656,250 16,656,250 16,656,250 16,656,250 16,656,250 16,656,250 426,656,250
flow

Interest 0.08125

Annual 33,312,500
interest

PV -₱15,005,630.63 -₱13,518,586.15 -₱12,178,906.44 -₱10,971,987.79 -₱9,884,673.68 -₱8,905,111.43 -₱8,022,622.91 - -₱6,511,340.72 -₱5,866,072.72 -₱5,284,750.20 - -
₱7,227,588.20 ₱4,761,036.2 ₱109,870,066.
2 58

PV of -
annuity ₱103,377,270.89

PV of P + -
I ₱109,870,066.58

Total PV -
of bonds ₱213,247,337.46

YTM - May 19, 11

16.32651674239
15%
- Mar 30, 15
16.32579303454
 Table 2. Amortisation of Old Bond Investment

Principal payment Interest payments Total payments PV factors Present value

Period 1, 2015 0 16,656,250 16,656,250 0.901 15,007,281.25

Period 2, 2015 0 16,656,250 16,656,250 0.812 13,524,875

Period 1, 2016 0 16,656,250 16,656,250 0.731 12,175,718.75

Period 2, 2016 0 16,656,250 16,656,250 0.659 10,976,468.75

Period 1, 2017 0 16,656,250 16,656,250 0.593 9,877,156.25

Period 2, 2017 0 16,656,250 16,656,250 0.535 8,911,093.75

Period 1, 2018 0 16,656,250 16,656,250 0.482 8,028,312.5

Period 2, 2018 0 16,656,250 16,656,250 0.434 7,228,812.5

Period 1, 2019 0 16,656,250 16,656,250 0.391 6,512,593.75

Period 2, 2019 0 16,656,250 16,656,250 0.352 5,863,000

Period 1, 2020 0 16,656,250 16,656,250 0.317 5,280,031.25

Period 2, 2020 0 16,656,250 16,656,250 0.266 4,430,562.5

Period 1, 2021 410,000,000 16,656,250 426,656,250 0.258 110,077,312.5

TOTAL Present 217,893,218.75

Value

Market rate is at the indicative pricing of 11%.

Interest payments = (410,000,000 x 8.125%) / 2

 Table 3. Valuation of Net Cash Flow

2015 2016 2017 2018 2019 2020 2021

Old bond -16,656,250 -16,656,250 -16,656,250 -16,656,250 -16,656,250 -16,656,250 -16,656,250 -16,656,250 -16,656,250 -16,656,250 -16,656,250 -16,656,250 -16,656,250

-410,000,000

Total cash -16,656,250 -16,656,250 -16,656,250 -16,656,250 -16,656,250 -16,656,250 -16,656,250 -16,656,250 -16,656,250 -16,656,250 -16,656,250 -16,656,250 -426,656,250
flows

New bond 500,000,000 -8,750,000 -8,750,000 -8,750,000 -8,750,000 -8,750,000 -8,750,000 -8,750,000 -8,750,000 -8,750,000 -8,750,000 0 0

-511,760,000 -500,000,000 0 0

Total cash -11,760,000 -8,750,000 -8,750,000 -8,750,000 -8,750,000 -8,750,000 -8,750,000 -8,750,000 -8,750,000 -8,750,000 -508,750,000 0 0
flows

Savings 4,896,250 7,906,250 7,906,250 7,906,250 7,906,250 7,906,250 7,906,250 7,906,250 7,906,250 7,906,250 -492,093,750 16,656,250 426,656,250

PV at -₱4,785,583.38 -₱63,580,790.09 ₱382,676,845.10 - -

(8.125-3.5) ₱12,659,975.6 ₱316,960,434.89
3

2.3125%

Savings in 4,896,250.00 333333333.33

year of issue 3333

Savings in 63,580,790.09 5833333.3333

periodic 3333
payments

Principal (382,676,845.10)
payment

Savings in 12,659,975.63
2020

Savings in 316,960,434.89
2021

15,420,605.51