Jaguar, where'd that extra $1 billion come from amid big yearly losses?

Cash is fungible. So if a company suddenly has $1 billion more of it, does it matter where it comes from? For Jaguar Land Rover, it should.


In its latest results, the iconic UK car company, owned by Tata Motors Ltd., posted around 1.4 billion pounds of free cash flow ($1.77 billion). That's a sharp turnaround from a running cash-burn rate of more than 500 million pounds per quarter over the last two years, and around negative 2.7 billion pounds over the last nine months alone. The company attributed the sharp rise to its efforts to manage working capital, including inventory reductions.


Meanwhile, Jaguar’s other numbers looked dismal – profits were down and debt was up from a year earlier. Free cash flow was “the only positive in these results,” Goldman Sachs Group Inc. analysts wrote in a note.


With a jump in cash flow that big, it’s worth asking how Jaguar pulled it off – particularly given its checkered performance in China.


Over the years, the company pushed a large volume of cars into the mainland market, offering some models at steep discounts. That ended up clogging inventory channels and burdening dealers. Around 70% of them lost money in the third quarter. Roughly 40% of the company’s dealers were based in tier 3 to tier 5 cities, and have been operating for less than three years: It takes a good deal more than an inexperienced staff to sell luxury cars in China’s poorest cities.


Jaguar has also spent aggressively on research and development and capital expenditure, with investment outlays comprising almost a fifth of total revenue. The company’s burden ticked up in tandem – to 4.5 billion pounds over the past year – and its leverage ratio rose to 2.3 times earnings before interest, tax, depreciation and amortization from 1.3 times at the end of last year.


To shore up the quarters of cash burn, Jaguar reduced spending and made around 100 million pounds in profit in the fourth quarter. Part of it was seasonal, too. But another maneuver also helped the company manage its working capital.


The company expanded a so-called factoring facility(3) – a working-capital loan – to $700 million from $295 million. For this to work, a company sells its receivables at a discount to raise money. When the dealer pays the company back, it can then repay its lenders. There’s a steep cost associated with this, of course. Such facilities are also typically used for fast-moving, high-margin businesses that can absorb the cost of the debt (and fees to lenders) – a position Jaguar isn’t in.


The company’s larger secured loan facility is essentially backed by cars it sells to dealers. According to the prospectus,(2) that applies to Land Rovers and Range Rovers. It immediately drew down more than $500 million from this loan, on top of $150 million previously. That facility can’t be expanded without new banks and is capped at $800 million. As a result, cash in hand rose to 3.8 billion pounds from 2.5 billion.


It’s fairly common for companies to use working-capital management strategies. For Jaguar, however, its volatile liquidity position makes this unsustainable. If China’s car market doesn’t turn around, it’s unclear when the receivables will get paid back. The longer repayment stretches out, the larger the fees. Prospects of significantly higher margins are also dim, which means such financing will become more expensive. Already such expenses have been growing. Starting next quarter, the receivables facility will be accounted as sold instead of debt.


In its results, the U.K. unit said it had other funding avenues, including secured ones like export credit-agency funding, new finance leases and even new bond issues. But tapping a secured facility – and immediately using it up – speaks for itself. It also points to Jaguar’s difficulty tapping capital markets: Getting unsecured funding depends on a company’s liquidity position. Funding is only going to get tighter. A $500 million bond matures in November this year while another $500 million matures in March 2020. The first quarter is seasonally tighter when it comes to cash, to boot.


A cash boost in one quarter doesn’t do much for the looming operational and financial issues Jaguar faces over the next year. Bondholders should hope the company has better news at its investor day next week.