MUMBAI -- Escalating trade tensions and Brexit are taking a toll on Jaguar Land Rover in the credit market, where the cost of insuring the company’s bonds has more than doubled this year.
Swaps that guard against a default for five years have climbed 172 basis points this year to 311 basis points, according to data provider CMA. That’s more than twice the biggest increase among CDS of 18 other auto-industry players globally tracked by Bloomberg. Jaguar Land Rover’s 2027 dollar bond has dropped about 10 cents on the dollar to 88.5 cents over that period, according to data compiled by Bloomberg.
The company’s sales would be threatened if President Donald Trump follows through with tariffs on auto shipments to the U.S., Jaguar Land Rover’s fastest-growing market after China.
A disorderly Brexit may make matters worse for Britain’s largest carmaker, with supply chain disruptions and the risk of tariffs by the European Union, Moody’s Investors Service said this month, when it downgraded Jaguar Land Rover’s corporate family rating one level to Ba2.
The company’s “challenges are unlikely to change in the short term,” Felix Freund, head of European investment-grade credit at Standard Life Investments in Edinburgh, said in an email. Although the bonds are already discounting these factors to a large extent, they “could underperform a bit more,” he said.
Freund, who manages $3.2 billion, said he’s been reducing his position in Jaguar Land Rover bonds over the past six months.
The ratings downgrade hurt Jaguar Land Rover’s bonds and CDS, a company spokesperson said in an email, noting that the U.S. market is key to its business, which is why its advocates tariff-free, friction-less trade.
“They obviously face challenges such as high investments, UK exposure, and the U.S. tariffs would hit them as they currently don’t have a plant there,” Manuel Schoeffler, head of high-yield securities at Deka Investment in Frankfurt, said in an email. “There are lots of moving parts in there that could impact the bonds negatively even though they already have underperformed recently and trade relatively wide,” he said.
The concerns about levies on overseas shipments of cars and trucks to the U.S. come at a time when deliveries in Europe have been sliding amid uncertainties surrounding diesel vehicles, the mainstay of Jaguar Land Rover. Trump and European Commission President Jean-Claude Juncker eased concerns about duties when they reached an agreement Wednesday to suspend new tariffs while negotiating over trade.
India’s Tata Motors, which owns the British company, has been working to change its product mix as the industry moves away from diesel, developing plans to build an electric vehicle in China. This shift will require money, at a time when the company faces maturing debt. More than half its $7.81 billion of outstanding bonds come up for payment by the end of 2021, according to data complied by Bloomberg.