TEXT-S&P raises Jaguar Land Rover rating to 'BB-'
June 29 - Overview -- U.K.-based automaker Jaguar Land Rover PLC's (JLR) 2011-2012 results were well above our expectations, supported by strong demand for premium cars. -- Strong cash flow generation strengthened its credit metrics and should support its ambitious investment plan. -- We are raising our long-term rating on JLR to 'BB-' from 'B+'. -- The positive outlook reflects our view of a more than one-in-three possibility that JLR will maintain credit metrics above levels we consider commensurate with the current rating. Rating Action On June 29, 2012, Standard & Poor's Ratings Services raised its long-term corporate credit rating on U.K.-based automaker Jaguar Land Rover PLC (JLR) to 'BB-' from 'B+'. The outlook is positive. At the same time, we raised our issue ratings to 'BB-' from 'B+' on JLR's GBP1 billion-equivalent senior unsecured notes and GBP500 million senior unsecured notes. The recovery ratings on these notes are unchanged at '4', indicating our expectation of average (30%-50%) recovery in the event of payment default. Rationale The upgrade reflects our upward revision of JLR's business risk profile to "fair" from "weak" and its financial risk profile to "significant" from "aggressive," as our criteria define these terms. Our revised assessments were triggered by JLR's strong unit sales, increased geographic diversification, and stable profitability through fiscal 2012 (ended March 31, 2012). Our revision of JLR's financial risk profile reflects its strong credit metrics, owing to cash flow generation that was higher than we anticipated, which should support the group's ambitious growth plans in our view. According to JLR's 2011/2012 preliminary reported results, the group significantly outperformed our base-case expectations. While we anticipated a decline in profitability margin owing to the introduction of new cars, the company maintained its margin close to last year's level, despite a sharp increase in investments. These positive results were supported by exceptionally strong demand for premium cars in 2011/2012--particularly from emerging markets--and the high level of consumer acceptance of Land Rover products, notably the new Range Rover Evoque. We believe that JLR's announced heavy investments will somewhat impair current profitability and credit metrics. That said, we understand these investments are needed to support the future growth of the Land Rover brand, allow the repositioning of the Jaguar brand, and help with JLR's progress toward emission reduction and compliance with CO2 regulation. In fiscal year 2013, we expect a low-double-digit increase in unit sales. Growth should be supported by strong interest for the new Range Rover Evoque and demand in China and Russia, which should partly offset expected weak demand in some large European countries. Over the same period, we anticipate a slight decrease in JLR's reported EBITDA margin by a few percentage points compared with the previous year, also thanks to the sharp increase in investments. In fiscal 2012, JLR reported over GBP900 million of free cash flow, despite the significant increase in investments. Based on the group's preliminary results, we believe that the ratio of funds from operations (FFO) to debt should stand in the low triple digits, higher than the 63% reported at fiscal year-end 2011 and well above the level consistent with the current rating. We understand that the announced increase in investments will reach about GBP2 billion in fiscal 2013 and in our view could continue to rise, resulting in negative cash flow generation in fiscal 2014. We therefore anticipate that credit metrics will weaken over the next two year, but believe FFO to debt will stay above 25%, which is the target for the current rating. Our ratings on JLR also take into account our anticipation of ongoing business and financial support from JLR's 100% owner, India-based Tata Motors Ltd. (BB-/Stable/--). JLR represents a very large part of the Tata Motors group, generating about 66% of its consolidated revenues and 70% of its consolidated EBITDA in fiscal 2012. We believe that Tata Motors would provide additional financial support to fund JLR's growth plan if needed, as it has done in the past. Liquidity We assess JLR's liquidity as "adequate" according to our criteria, with funding sources covering uses about 1.6x for the next 12 months. At the end of March 2012, liquidity sources included: -- Cash of about GBP2.4 billion, of which we estimate about GBP800 million to be restricted because of its location in jurisdictions where it might not be immediately available, and because we assume a portion is needed for operations. -- About GBP776 million available under JLR's committed lines maturing in more than 12 months, following the recent notes issue. On the same date, funding needs included: -- Short-term financial debt of GBP505 million (including GBP157 million of preferred shares). -- A potential cash burn for fiscal2013 according to our conservative scenario, which we estimate at GBP200 million for the next 12 months. The bond documentation includes a covenant that limits incurrence of debt subject to interest coverage. By our estimates, covenant headroom is currently well above 30%. The backup lines documentation also includes some covenants and we estimate that in this case the headroom is significant. Recovery analysis JLR's GBP1 billion- equivalent senior unsecured notes due 2018 and 2021 and GBP500 million senior unsecured notes due 2020 are rated 'BB-', in line with the corporate credit rating. The recovery ratings on these notes remain unchanged at '4', indicating our expectation of average (30%-50%) recovery prospects for noteholders in the event of payment default. Our recovery expectations for the unsecured notes are underpinned by JLR's asset valuation, which we base, among other factors, on its iconic brand names. Our recovery expectations are also supported by JLR's insolvency jurisdiction of the U.K., which we consider to be relatively favorable for creditors. At the same time, our recovery expectations are constrained by the unsecured nature of the notes, which rank behind secured claims, including significant pension claims. The unsecured notes are guaranteed by subsidiaries representing about 87% of JLR's assets, 46% of its revenues, and 82% of its EBITDA. According to our recovery criteria, we determine recovery expectations by simulating a hypothetical default scenario. In the case of JLR, we simulate a hypothetical default in 2015, triggered by deterioration in JLR's operating performance amid an economic and financial downturn. This would lead to a steady decline in revenue, deteriorating profitability, and negative free cash flow over the next three years. Given JLR's significant market positions, we value the company as a going concern at the point of default, using a combination of market multiple and discrete asset valuation methodologies. We estimate that JLR's stressed enterprise value would be about GBP2.1 billion at the point of hypothetical default in 2015. We deduct from the stressed enterprise value priority liabilities of about GBP500 million, comprising the pension deficit, capital leases, and enforcement costs. The resulting net enterprise value is about GBP1.64 billion. From this, we deduct approximately GBP642 million of secured debt, comprising: -- An existing GBP116 million borrowing-base facility. -- GBP159 million of other secured debt allowed under the documentation for a GBP710 million revolving credit facility (RCF). -- GBP318 million of factoring facilities, which we assume to be drawn by the year of default. -- Six months of prepetition interest. The remaining value would, in our view, enable the unsecured lenders (of the GBP1 billion-equivalent notes, the GBP500 million notes, and the GBP551 million of debt under the RCF) to achieve recovery of 30%-50%, resulting in a recovery rating of '4'. Outlook The positive outlook reflects our view of a more than one-in-three possibility of an upgrade over the next 12 months if JLR maintains FFO to debt well above 25%, our target for the current rating. This could happen if demand for premium cars remains supportive--in line with our expectation--, the product renewal of Land Rover and Jaguar is successful, the deterioration in profit margin is minimal, and if cash burn is limited to about GBP200 million over fiscal 2013. We see a number of risks, however, that could jeopardize this positive scenario, including a lack of success of the new product range or of the repositioning of Jaguar, and adverse economic developments across JLR's markets. We will monitor JLR's cash flow generation over the coming quarters. We could revise the outlook to stable if JLR's operating performance falls below our base-case expectations. This could occur if growth in emerging markets weakens or in the event of a global recession. In addition, a lack of success of the new product range or the repositioning of the Jaguar brand could also negatively affect JLR's financial results. We could also revise the outlook to stable if JLR fails to achieve revenue growth of at least 10% and EBITDA margin of 12% in fiscal 2013. Related Criteria And Research -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 Ratings List Upgraded To From Jaguar Land Rover PLC Corporate Credit Rating BB-/Positive/-- B+/Positive/-- Jaguar Land Rover PLC Senior Unsecured* BB- B+ Recovery Rating 4 4 *Guaranteed by: Land Rover Exports Ltd., Jaguar Cars Ltd., Jaguar Car Exports Ltd., Jaguar Land Rover North America LLC and Land Rover. Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. 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