By Sarah Young
LONDON (Reuters) – Rolls-Royce plans to raise a total of 5 billion pounds ($6.5 billion), including 2 billion from shareholders, to cope with a “worst case scenario” as the coronavirus travel crisis crushes the British engine maker’s cashflow.
Airlines pay Rolls based on how many hours its engines fly in their larger jets and worries over a long-haul travel slump have knocked more than 80% off its shares this year, reducing its market value to just 2.5 billion pounds.
Rolls, whose engines power the Boeing 787 and Airbus 350, said in May it would cut 9,000 jobs as a result of the pandemic and its finances have come under intense scrutiny, which its chief executive said should end with Thursday’s plan.
“This is a comprehensive package which will take any liquidity questions off the table through this crisis,” CEO Warren East told reporters on a call.
“We wanted this package to provide sufficient headroom even through our worst case scenario,” East said.
A rights issue has been mooted as an option since July, but East said Rolls had to first demonstrate its restructuring plan was working before it could tap shareholders.
“We couldn’t really have done this much quicker,” he said.
Rolls faces what East called a “pinch point” towards the end of 2021 when 3.2 billion pounds of debt needs to be repaid. To pay for the crisis, Rolls’s debt will jump to over 3.5 billion pounds this year from 993 million pounds last year.
Worries about its finances have prompted speculation of a government bailout of Rolls, which was nationalised in 1971 and later privatised.
But Chief Financial Officer Stephen Daintith dismissed this, saying: “That’s not part of any of our plans”.
Britain’s best known engineering firm is a key supplier to the country’s military programmes, invests heavily in research and development and helps sustain smaller suppliers.
Rolls shares were down 11% to 116 pence at 1118 GMT, their lowest level since 2004, after it said that it would raise about 2 billion pounds through a 10 for 3 discounted rights issue.
This was fully underwritten at 32 pence per share, it said, a 41% discount to the theoretical ex-rights price, which analysts calculated at 54.6 pence.
“The raise is coming at a deeper discount than expected and the recovery scenarios presented were more optimistic than the market is currently thinking,” Investec analyst Ben Bourne said regarding Thursday’s share price fall.
LONG HAUL AHEAD
On the flying recovery, East said Rolls was now able to withstand a downturn which would involve 2021 flying levels at less than half last year’s levels. But long distance flying remains in the doldrums with a second wave of the coronavirus across Europe and airlines cutting back already reduced schedules.
Rolls said if long-haul travel did recover, then despite a cash outflow of 4 billion pounds this year it expected to return to positive cashflow during the second half of next year and was targeting 750 million pounds of free cashflow in 2022.
Shareholders will vote to approve the rights issue at a general meeting expected to be held on Oct. 27 and conditional upon its completion, additional debt options will open up.
Rolls said it intended to begin a bond offering to raise at least 1 billion pounds, while UK Export Finance has indicated it was ready to support an extension of its 80% guarantee of Rolls’ existing 2 billion pound five-year term loan and would support a loan amount increase of up to 1 billion pounds.
Rolls also said it had commitments for a new two-year loan facility of 1 billion pounds.
Yields on Rolls’ bonds edged off their highs, with a 500 million euro May 2024 note trading at 4.93%, well off this week’s high of 5.25%. .
The new debt follows a plan announced in August to raise at least 2 billion pounds from the sale of Rolls’ Spain-based turbine blade maker ITP Aero and other assets.
In July, Rolls’s debt rating was cut to junk by Moody’s, but with the equity raising and disposals, Rolls said it should be able to return to an investment grade rating in the medium term, helping boost airline customer confidence in contracts.
“A strong financial position matters a lot to our customers,” said East.
($1 = 0.7729 pounds)
(Reporting by Sarah Young; additional reporting by Abhinav Ramnarayan, Editing by Kate Holton and Alexander Smith)