Rolls-Royce in £3bn cash call, bond offering to bolster finances

Aircraft engine maker Rolls-Royce unveiled plans to raise up to £5bn through a debt and equity raising to shore up its balance sheet in the face of the coronavirus pandemic.

The company on Thursday announced a 10-for-three £2bn rights issue at a heavily discounted price of 32p a share and £1bn bond offering. It has also agreed a new £1bn two-year term loan facility conditional upon the rights issue completing.

Roll-Royce has been hammered particularly hard by the collapse in air travel as it is paid by the number of miles flown by aircraft using its engines. Shares in the company have plunged more than 80% to 130p since January as the pandemic led to airlines grounding, and subsequently shrinking, their operational fleets.

Chief executive Warren East said the COVID-19 pandemic had caused a “sharp deterioration in the financial performance of our civil aerospace business and, to a lesser extent, our power systems business”. The company in 2019 generated £4bn of gross cash inflow from its large engine fleet, but flying hours halved in the first half of 2020.

“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.”

Rolls-Royce added that the UK government through UK Export Finance had also indicated it was ready to support an extension of its 80% guarantee of Rolls' existing £2bn five-year term loan. It would support a loan amount increase of up to £1bn.

The company said it continued to experience free cash outflows in July and August, albeit at a reduced level compared to the first half of 2020 "and modestly better than our expectations".

"This reflected the ongoing management actions to control costs, large engine flying hours slightly ahead of our base case forecast and some cash flow timing benefits."

"We continue to expect a free cash outflow of approximately £4bn in the full year ending 31 December 2020, although uncertainties remain around the timing and shape of the recovery in large engine flying hours and the timing of large engine deliveries."

Rolls-Royce lost £5.4bn in the first half and plans to cut 9,000 jobs globally in response as it does not expect the airline industry to return to 2019 levels until 2025 at the earliest.

Hargreaves Lansdown analyst Susannah Streeter said the cash call "is the least worst option" for Rolls-Royce and added that it should give the company "a lot more room for manoeuvre to help it navigate the Covid crisis".

"While civil aerospace has been a huge drain on the company, its defence and power systems business has already proved more resilient, the firm will be pivoting future investment into those operations as part of the restructuring programme.’’

AJ Bell investment director Russ Mould noted that the equity component of the new fundraise equated to a theoretical ex-rights price of 54.6p.

"It was only two years ago that Rolls-Royce was trading above £10, illustrating a massive fall from grace. Investors taking part in the share and bond issue need to have considerable faith in the aviation industry getting back on its feet. Handing over money now to back Rolls-Royce would also require considerable patience as this is unlikely to be a rapid recovery story."