Refinancing Case Study: JLR Bond Valuation, Benefits and Factors

This case study analyzes the factors driving the issuance of new debt in 2015, considering lower interest rates compared to 2011 notes, resulting in significant interest expense savings. The analysis explores the impact on cash flow, bondholder willingness to surrender holdings, and the overall savings from refinancing the outstanding debt. The benefits of this strategy for the firm, bondholders, and equity holders are examined, including the ability to alter bond tenors and debt mix, early payoffs, and improved financial reporting. The case also highlights the importance of considering fees, market conditions, and alternative debt-raising strategies. The provided solution outlines key considerations for successful bond refinancing, supported by references to relevant financial literature.

REFINANCING
CASE FOR REFINANCING
NAME OF STUDENT
NAME OF UNIVERSITY

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1. Factors leading to raising of new debt in 2011.
According to Ames (2012), the factors that would lead to raising of new debt in 2015 in
light of lower interest rates as compared to the note sissued in 2011 are;
a. Lower interest rates. The 2015 notes have a coupon rate of 3.5% as compared to the
2015 notes which have a coupon rate of 8.125%. This present a savings of more than 57
% on interest expense. The savings are calculated as 1-(3.5/8.125)*100=57%.
As the annual interest expense is well over $15 m. A 57% reduction in this expense is a
major factor in considering raising new debt.
b. Improve cashflow position . As the business is now generating positive cashflows
primarily from operations ,then there is need for more investments. The positive
cashflow in 2014 and the nine months for 2015 indicate that the company can
accommodate this adjustment . The net effect on the new debt holdings will be the that
the proceeeds of the loan which is ($500m less $410m) which will mean the cash
inflow will be increase by 90m. Refinancing will also result in in savings from an
interest expense of 40m.This shows the net effect will be an increase in cashflows by
($122m.
2. Amount which existing bondholders will be willing to surrender their holdings.
The bondholders can only accept an amount that gives them the fair value of their holdings.
(Bragg, 2018). A bond has two components which are the cashflow in the form of the
guaranteed coupon rate over the life of the bond or the value of the bond . In our case ,the
bondholders can only accept to surrender their holding if they are compensated for the
expected future cashflows or are compensated for market value of the bond. To this end ,the
bondholders will compare the premium and the cashflow as the items to consider and base
the compensation they will require before accepting to swap the bonds. Of course the
bondholders will only accept the higher of future cashflow plus par value or the market
value of the bonds . This is presented in row “18” in the attached excel.
The foregone interest is $117m and the market premium is $46m. The bond holders can
only take this offer if they are given $117m as premium.
3. If there will be savings “in cash flow/expenses” if the whole outstanding debt is refinanced.
As attached in the excel.There will be savings in;
a. Interest expense which reduces from $33m to $17.5m annually representing a savings of
$16m.This transalates to savings of $118m over the term of the bonds.
b. The cashflow position of cash released is $90m when we factor the payments of the
premium and the extra cash released on moving to a higher bond amount ($500) from a
lower bond amount ($410m).
This strategy results in cost savings for the company in the form of the interest expense
reducing from from $33m to $17.5m annually
Overall, the company has gained the extra cash flow of $90m at almost the same
financing cost as that of the existing loan of $410m.

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4. What other benefits from this strategy “add value” for the firm,bondholders and equity
holders.
The benefits of this strategy to the firm are;
a. The company can alter the tenor of the bonds by moving from one with a tenor that is
most favourable to the company. A longer tenor may make the company achieve its
objctives without the pressure of an early maturing bond. This flexibility is very
important as it can make a company adjust its financing tenors.
b. It can also benefit the company by making it easier to exit its obligtions to take
advantage of the prevailing regime of changing interest rates. The company can also
alter its debt mix by having the debt position where there are a low interest rates or there
is little barriers to exit.
The benefits of this strategy to the bondholders are;
a. Early pay off. The bond holders can cash in the future cash flows in the present period.
This is a windfall as this presents a good deal especially if you discount the cashflows.
The bondholder can reinvest the proceeds to other investments or take up the offer of
reinvesting in the reissued bonds.
The benefits of this strategy to the equityholders are;
a. The equityholders will benefit in this arrangement as the company will report better
revenues as it has a stable finacing arrangemt that reduces expenses and improves the
cashflow. The company will also not go back to equityholders for for more cash.
Other issues to note is that issuing new bonds has some costs in that there are fees paid to third
parties to arrange for such transactions . Such fees are significant and should also be taken in to
consideration as part of the cost of reissuing the bond.
Another thing to note is that it is very important to study the market so that the reissue of the
bond can be done successfully. The bond should only be floated by the market only when it is
certain that the uptake will surpass the set threshold will be realised. Failure to meet the threshold
will mean that the company will have mix of debt that may not be desirable (“Advantages and
Disadvantages of Bonds | Boundless Finance,” 2019)
The bond should only be taken after evaluation all possible alpternative of raising debt. This
should also be done with the outlook of the market in the coming years . Sometimes it is better to
wait and watch the market for looming developments like interest rate changes.

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References
Advantages and Disadvantages of Bonds | Boundless Finance. (2019). Retrieved October 9, 2019,
from Lumenlearning.com website:
https://courses.lumenlearning.com/boundless-finance/chapter/advantages-and-
disadvantages-of-bonds/
Ames, T. (2012). Refunding Bonds vs. Refinancing Bonds. Retrieved October 9, 2019, from
Thenest.com website: https://budgeting.thenest.com/refunding-bonds-vs-refinancing-bonds-
24208.html
Bragg, S. (2018, March 12). AccountingTools. Retrieved October 9, 2019, from AccountingTools
website: https://www.accountingtools.com/articles/what-is-bond-refunding.html
Taylor, C. (2017). How to Calculate a Bond Buy Back. Retrieved October 9, 2019, from
Pocketsense website: https://pocketsense.com/calculate-bond-buy-back-4274.html
Ten things an issuer should consider when conducting a liability management exercise with respect
to its bonds | Global law firm | Norton Rose Fulbright. (2016). Retrieved October 9, 2019,
from Nortonrosefulbright.com website:
https://www.nortonrosefulbright.com/en/knowledge/publications/94c08e07/ten-things-an-
issuer-should-consider-when-conducting-a-liability-management-exercise-with-respect-to-
its-bonds