Shares in Rolls-Royce have tumbled to a 17-year low as the aircraft engine-maker announced a £5bn emergency plan to shore up a balance sheet ravaged by the coronavirus pandemic.
The dramatic decline in global air travel during the pandemic has hit Rolls-Royce’s revenues from servicing its jet engines and from selling new ones.
The engineering group said it would tap shareholders in a £2bn rights issue and raise more debt through a £1bn bond offering. It also announced a new two-year loan of £1bn and a potential £1bn extension of a loan that would be 80% backed by the government’s UK export finance agency (UKEF).
The £2bn rights issue was the largest capital raise by a non-financial public company in the UK since 2010, according to Greenhill, one of the investment banks advising Rolls-Royce. Eleven investment banks were among the recipients of £80m in fees connected to the fundraising.
It follows days of speculation and share price falls at the manufacturer, which has lost 80% of its value since January and has a market capitalisation of less than £2.5bn. At one point on Thursday, its shares were trading at 112.55p, the lowest since 2003. They ended the day down 10.2%, at 117p.
Rolls-Royce said its rights issue was fully underwritten, and was offering a 41% discount, with the company planning to issue 10 new shares for every three existing shares. In addition, the group has agreed a new two-year loan facility worth £1bn, conditional on completing the equity raise.
The Derby-based company said the measures were designed to improve its liquidity and reduce the debt on its balance sheet. It added that it did not expect to generate cash again until 2022.
Rolls-Royce has been hit hard by the impact of coronavirus on its civil aviation business, and in August it reported a record £5.4bn first-half loss. The company said it expected to have burned through £4bn in cash by the end of 2020.
Demand for its engines has slumped, and the group is in the middle of the largest restructuring in its history, cutting 9,000 jobs globally and closing several production sites. It is also looking to sell assets to raise at least £2bn, including the Spanish engine-maker ITP Aero.
Rolls-Royce’s chief executive, Warren East, said: “We are undertaking decisive and transformative action to fundamentally restructure our operations, materially reduce our cost base and improve our financial position. The capital raise announced today improves our resilience to navigate the current uncertain operating environment.”
Before Thursday’s announcement, Rolls-Royce had come in for criticism from some of its shareholders for a perceived delay in announcing the details of its cash-call.
East said the company had wanted to put together an “integrated package”, including raising equity, fresh debt and loans.
“It was important we got other elements of the package in place before running to the equity market,” he said. “We could sit this out for another six months, but that would give us serious issues around going concern. We know the debt and equity markets are open now and we don’t know if they will be.”
Rolls-Royce predicted it would take until 2025 for aircraft engine orders to return to pre-coronavirus levels, and said its path to making money again remained dependent on the timing and shape of the economic recovery from the pandemic.
The rescue package received a cautious welcome from some analysts. The credit ratings agency Moody’s, which cut Rolls-Royce’s rating to junk status in July, said the fundraising was overall a positive in terms of the prospects of the company paying back its debt, but highlighted continued uncertainty for aviation.
“Rolls-Royce’s proposed debt and equity raising package will substantially improve liquidity headroom to manage through a potentially slow and delayed recovery in engine flying hours,” said Martin Hallmark, a senior vice-president at Moody’s. “But downside risks around future cashflows including its delivery of cost savings and the evolution of market recovery, mean liquidity headroom remains uncertain.”
