International Financing Review March 7 2020^39BONDS HIGH-YIELDAdam Spielman, head of leveraged credit at
PPM America.
h(OMEBUILDERSûAREûINûTHEûRIGHTûGAPûTOûlLLû
that need for housing in those areas of the
country.”DEMAND FOR HIGH-YIELD
Investor demand is helping borrowers
access the capital markets at cheap levels -
#ANADIANûlRMû-ATTAMY ûFORûEXAMPLE û
priced US$600m of B1/BB rated 10-year
NON
CALLûlVEûUNSECUREDûBONDSûATûJUSTû
4.625% on February 20.
And in the secondary market, as well as
being drawn to positive fundamentals,
investors are also eyeing the potential for
rising stars.
Upgrades into investment grade can
lead to a lift in bond prices, as well as
reducing the stock of remaining high-
yield bonds in the sector, providing some
scarcity value.
Last week, Moody’s put the Ba1 ratings of
LENNAR and TOLL BROTHERS - two of the largest
US homebuilders - on positive outlook,
putting them on the cusp of an investment-
grade rating.
The agency said it expected Lennar to
MAINTAINûAûCONSERVATIVEûLEVERAGEûPROlLEûANDû
SHIFTûTOWARDSûAûLIGHTERûLANDûPROlLE ûWHICHû
reduces impairment risk and enhances
CASHmOWûGENERATION
Likewise, the agency said Toll Brothers’
strong liquidity, leverage and operating
STRATEGYûWEREûSUPPORTIVEûOFûITSûCREDITûPROlLE
Investors are cognisant that
homebuilding is a cyclical business, but this
KINDûOFûlNANCIALûSTRATEGYûCONTRASTSûWITHûHOWû
the builders operated in the run-up to the
LASTûlNANCIALûCRISIS ûWHEREûSOMEûCOMPANIESû
were left stranded with large holdings of
land after bingeing.
“Some of them were too aggressive going
in on land, and they had a hard time moving
that, which put pressure on their credit
PROlLES vûSAIDû3PIELMAN
“But this sector has been well behaved for
a long time after the housing crisis. It hasn’t
experienced the same sort of credit erosion
as we see in other sectors.”
A widespread economic downturn that
puts pressure on employment levels would
inevitably dent this demand for new homes
and weaken the sector.
But many investors feel that is still a way
off, and that other sectors with less robust
CREDITûPROlLESûWOULDûBEûHITûHARDERûBYûAû
downturn.
“We’re a little more sanguine about the
US economy,” said Temple. “We think it is
more resilient than people give it credit for.
!SSUMINGû;THEûCORONAVIRUS=ûDOESNTûLASTû
much longer than the next couple of
months, we should get a pretty good
rebound in activity.”EUROPE/MIDDLE EAST/
AFRICAJLR LOOKS TO WEATHER
CORONAVIRUS STORMJAGUAR LAND ROVER bonds have fallen on
coronavirus fears, but the company says it
has ample liquidity and no imminent need
to return to market after deciding not to
proceed with a US dollar debt raise last
month.
The carmaker’s bonds have dropped over
10 points since coronavirus-related volatility
took hold of markets in mid-February.
Its euro 2.2% January 2024s were bid at 82
on Friday, down from 95 in mid-February,
according to Tradeweb data. The 4.5%
January 2026s were at 83, down from 97
over the same period.
Those levels, along with JLR’s recent
NEWSmOW ûWOULDûMAKEûAûTRIPûTOûTHEûPRIMARYû
market unlikely at this point, said two
investors.
But JLR has £3.9bn in cash as of December
31 and an undrawn £1.9bn revolving credit
facility maturing in July 2022 on hand, said
treasurer Ben Birgbauer.
“We have no imminent need to come
back to the market,” Birgbauer said.
In addition JLR has a “light bond maturity
schedule”, he said. It has a US$500m 3.5%
bond due in March 2020, and a £300m 2.75%
note maturing in January 2021.
The schedule may be light, but it is
constant. The company has €4.75bn-
equivalent of bonds outstanding and
maturities falling every year until 2027,
with the exception of 2025, according to
2ElNITIVûDATA
“This is a company that needs to come
every year,” said one investor.
“We regularly monitor the markets for
opportunities to issue, and when markets
are operating more normally we will
consider an issue again,” Birgbauer said.
He said JLR would reserve the decision on
which currency to issue in depending on
market conditions at the time.
“We want to have access to all of the
major debt markets,” he said.
JLR held a non-deal roadshow in early
February, where it visited US investors to
sound out appetite for a senior unsecured
US dollar trade.
But those plans were scuppered by an
uptick in coronavirus cases and a warning
from Apple that it was unlikely to meet
quarterly sales guidance because of the
epidemic.
Around the same time, chief executive
Ralf Speth said the company was having to
mYûPARTSûINûSUITCASESûFROMû#HINAûTOûTHEû5+ûTOû
maintain production.JLR has said sales in China, the world’s
biggest auto market, have been hit by the
coronavirus outbreak. The company had
previously seen business in the region
RECOVER ûHELPINGûITûRETURNûTOûPROlTABILITYûINû
recent quarters.
The potential impact of the coronavirus
on JLR’s supply chain and on sales in China
is worrying investors.
h)TûWILLûBEûVERYûDIFlCULTûFORû*AGUARûTOûCOMEû
to market when they no longer have a story
to tell,” said the investor.
JLR’s Chinese recovery was the story
behind its successful visit to the euro market
in November and December, the investor
said.
“Jaguar’s last bond did so well because
sales in China were doing much better,
which had been a pressure point for the last
three years,” he said.
“That was the one leg their story was
standing on. If you cut that leg, there’s no
story.”
JLR raised €1bn in total from two visits to
the euro market in the last two months of
the year - a move that now looks “pretty
fortuitous”, a second investor said.
“That has removed a lot of pressure for
them,” he said.
A third investor was sanguine.
“This is a temporary setback and Jaguar
has plenty of liquidity to weather it,” he said.
A fourth investor said Jaguar has a “ton of
liquidity”.
Lucror Analytics analysts agreed. “We
BELIEVEû;OWNER=û4ATAû-OTORSûANDû*,2ûHAVEû
THEûmEXIBILITYûTOûCOPEûWITHûTHEûPREVAILINGû
uncertainties, as JLR’s liquidity remains
adequate.”
4HEûCOMPANYûREPORTEDûAûaMûPROlTûINû
the third quarter, up £591m year-on-year.
JLR said on January 30 the improvement
REmECTEDûAûhCOMBINATIONûOFûTHEûHIGHERû
China volume, stronger product mix, lower
operating costs and favourable foreign
exchange”.
JLR has been working on cutting costs
under its “Project Charge” transformation
programme. By the end of December, it had
made £2.9bn of cost cuts and is aiming for a
TOTALûOFûaBNûINûhCOSTûANDûCASHmOWû
improvements” by March 2021.
In addition, the company has launched
models, including the Land Rover Defender
and the new Jaguar F-Type.
“Jaguar Land Rover has seen a broad
recovery based on new models and cost
improvements, as well as improved China
sales,” said Birgbauer.REFI RISK FLARES IN EUROPEAN
HIGH-YIELD MARKETSeveral high-yield borrowers could face an
UPHILLûBATTLEûTOûRElNANCEûUPCOMINGûDEBTû6 IFR Bonds 2323 p 25 - 53 .indd 39 06 / 03 / 2020 19 : 18 : 08