Credit ratings agency Moody’s Investors Service has downgraded Jaguar Land Rover’s rating.
The Midland car maker has been downgraded to the B1 classification from Ba3 and Moody's has warned of a “negative outlook”.
The downgrade reflects declining sales in China, the need for investment in electrification and a swingeing cost-cutting programme.
The move also takes into account potential problems posed by a no-deal Brexit or the introduction of US tariffs.
However, Moody’s also said the ratings reflected the cyclical nature of the automotive industry, which can be “exposed to big swings in performance combined with high fixed costs”.
Tobias Wagner, vice-president and senior analyst at Moody’s, said: “The downgrade reflects Moody’s expectation that leverage will remain elevated and free cash flow negative for fiscal years 2020 and 2021 as Jaguar Land Rover seeks to turn around performance in China, executes its restructuring programme and continues to invest in its future model line-up including electrification.
“The negative outlook further reflects the challenge to turn around financial performance in a subdued market environment and as other manufacturers also prepare to launch electric vehicles.
“Risks regarding a potential no-deal Brexit or potential US tariffs also remain.”
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Moody’s has also downgraded the instrument ratings on Jaguar Land Rover bonds to B1 from Ba3.
It says free cash flow is likely to remain materially negative and that Jaguar Land Rover needs to continue to invest in the future model line-up, including electrification.
However there is a strong focus on what has happened to the car maker in China.
It says Jaguar Land Rover needs to address declining sales in what had become its largest market and strengthen its sales operations in the region, while continuing to cut costs.
Mr Wagner added: “The Chinese market remains a major challenge for JLR as retail sales continue to decline.
“Moody’s believes that China was a major profit contributor and hence the decline substantially contributed to the decline in profitability in the last quarters.
“However, Moody’s also expects the company’s restructuring programme, project Charge and Accelerate, to support profitability improvements in fiscal 2020 and beyond not the least from the significant and already executed headcount reduction.”
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But what exactly does the Moody’s move mean for Jaguar Land Rover going forward?
Warwickshire-based automotive industry expert Dr Charles Tennant has offered his opinion on the latest downgrade.
Mr Tennant, Land Rover’s former chief engineer and a leading light at WMG at the University of Warwick, said: “Moody’s has just hit Jaguar Land Rover with a downgrade on its credit rating, the third in just one year.
“The rating is now at B1 with a negative outlook due to plunging sales, losses, and the expectation of negative cash flow for the next couple of years.
“This downgrade is at the worst possible time for JLR when huge investment for electrified vehicles is piling on the pressure and the company needs to refinance existing debts of £1 billion over the two years.
“The outlook for its owner Tata Motors is just as bleak where their Moody’s rating was downgraded to Ba3 also with a negative outlook.
“These are also tough times for Tata in India where car sales have crashed and manufacturers are halting production due to massive stocks of unsold cars.
“Tata Motors already has a gross debt level at over £10 billion and these poor ratings will make servicing debts harder and more expensive."
Mr Tennant added: “This is because these ratings for large corporations have similar implications to our own personal credit ratings, where a poor rating makes it harder for people to get mortgages and credit cards, and the debt becomes more expensive with higher interest rates.
“In fact, due to the credit downgrade Tata Motors’ shares are now considered non-investment grade or more derisively as junk bonds.
“To put these credit ratings into perspective JLR’s main competitors BMW, VW, and Mercedes all have Moody’s investment grade ratings at the upper investment grade levels of A1 to A3, with a positive outlook.
“Admittedly JLR do have cash and credit reserves of £5.7 billion to draw on, and are slashing costs all over the company right now.
“However, with a disproportionate investment cash burn rate of around £4 billion per year, this puts massive pressure on the company to restore sales and profitability fast, especially if as it maintains it desires to be an independent company within the Tata empire.”