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JLR Ratings Cut By Moody’s, Citing China, Electrification

JLR Ratings Cut By Moody’s, Citing China, Electrification.

“Risks regarding a potential “no-deal Brexit” or U.S. tariffs also remain”

Moody’s Investors Service downgraded some debt ratings of troubled maker of luxury SUVs and sports cars Jaguar Land Rover (JLR) because of its continuing troubles in China and worries about the huge amount of capital required to fund electrification.

JLR is based in Britain and owned by Tata Motors of India.

JLR reported a loss of $4.6 billion for its financial year ended March 31.

JLR has said it was cutting 4,500 jobs as part of a turnaround policy. In November last year JLR announced a plan, “Charge and Accelerate”, to slash $3.2 billion in costs over the next 18 months. As JLR stumbled, reports gathered pace that Tata Motors would seek to sell it, with PSA Group of France the likely bidder. But Tata has fiercely denied the plan.

In a statement Thursday Moody’s said it cut JLR’s corporate family rating to B1 from Ba3, with a negative outlook.

“The downgrade reflects Moody’s expectation that leverage will remain elevated and free cash flow negative for fiscal years 2020 and 2021 as Jaguar Land Rover seeks to turn around performance in China, executes its restructuring program and continues to invest in its future model line-up including electrification”, said Tobias Wagner, Vice-President and Senior Analyst at Moody’s.

“The negative outlook further reflects the challenge to turn around financial performance in a subdued market environment and as other manufacturers also prepare to launch electric vehicles. Risks regarding a potential “no-deal Brexit” or potential U.S. tariffs also remain.” Wagner said.

No bid by PSA
In a report earlier in June, Berenberg Bank of Hamburg, Germany, doubted there would be a bid for JLR because its cost structure was already close to benchmark levels. PSA Group successfully bought General Motors European subsidiaries Opel and Vauxhall by cutting costs and turning a long-time loss maker into a profit earner.

Berenberg Bank analyst Alexander Haissl said JLR doesn’t offer any low-hanging fruit.

“A potential acquisition of JLR has been speculated, but our analysis shows a much less favorable risk/reward profile versus the (Opel Vauxhall) deal. JLR’s operational performance materially deteriorated over the past two years and we estimate the cash burn was 1.2 billion euros ($1.4 billion) over this period,” Haissl said.

“Reducing or stopping the cash burn is more difficult, in our view, as JLR’s cost structure is close to benchmark levels. More meaningful savings can likely only be achieved by reducing the model offering, which should be possible even without a merger. Therefore, it is unclear if Tata Motors would even be willing to sell at the current, arguably depressed, valuation or if it believes the initiated turnaround measures will succeed.” Haissl said.

Other analysts have disagreed, saying JLR could solve one of its biggest problems – upcoming CO2 regulations in Europe – by merging with PSA and lower its CO2 rating after merging with the French company’s best in class performance on fuel economy. JLR, which sells more than 20% of its vehicles in the U.S., would also provide PSA Group with a foothold there.

Jaguar shake-up required
As well as quality problems in China and a need to address its over-reliance on diesels in Europe, analysts also say JLR needs to shake up Jaguar.

According to Moody’s Wagner, JLR needs to invest more in its product range.

“The investments include the launch of the Defender in 2019, the investment in a flexible architecture to enable all models to be offered with hybrid or increasingly full battery electric powertrain options from 2020 but also investments into the core product range,” Wagner said.


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