After weeks of media speculation, UK aero engine manufacturer, Rolls-Royce Holdings, has officially announced its intention to raise £2bn by way of a fully underwritten rights issue. In conjunction, Rolls-Royce also intends to raise gross a further £1bn via a bond issuance and has agreed commitments for a new two-year term loan facility of £1bn and has received an indication of support in principle from UK Export Finance (UKEF) for an extension of its 80% guarantee to support a potential increase of the company’s existing £2bn five year term loan of up to £1bn. The full package will result in a total of £5bn in new capital for the manufacturer to boost its liquidity and reduce its balance sheet leverage.
The fully underwritten rights issuance of up to 6,436,651,043 New Ordinary Shares at 32 pence each. Existing shareholders are being offered 10 shares at 32p each for every three they own, which equates to a 41.4% discount on the stock price. Rolls-Royce shared closed at 130p yesterday (30 Sept). Shareholders will approve the rights issuance at a general meeting on October 27.
The Rights Issue is fully underwritten with BNP Paribas, Citigroup, Goldman Sachs, HSBC, Jefferies and Morgan Stanley acting as joint global coordinators and Crédit Agricole CIB, Santander, SMBC Nikko and Société Générale acting as co-lead managers. Goldman Sachs and Greenhill are acting as financial advisers to Rolls-Royce. Jefferies and Morgan Stanley are acting as joint sponsors to the company.
The new two-year £1bn loan facility – which is conditional upon the Rights Issue completing – also require the cancellation of the £1.9bn liquidity facility and execution of a facility agreement.
As mentioned above, UKEF has agreed in principle to support an extension of its 80% guarantee of Rolls-Royce’s existing £2bn five year term loan to support a loan amount increase of up to £1bn. This is also subject to the completion of the rights issue.
Rolls states that these steps will provide the Group with “improved financial resilience and a more appropriate balance sheet structure in order to weather macro-economic risks before we return to strong cash generation, expected in 2022”.
The aero engine manufacturer believes that its longer-term prospects remain strong, with its “relatively young installed base of engines” expected to provide “strong, annuity-style cash flows over the long term, reflecting the long in-service lives of our products and our services-oriented business model”.
“The sudden and material effect of the COVID-19 pandemic has had a significant impact on the commercial aviation industry, resulting in a sharp deterioration in the financial performance of our Civil Aerospace business and, to a lesser extent, our Power Systems business,” says CEO Warren East. “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. By raising additional capital now, we will improve our liquidity headroom and reduce our level of balance sheet leverage, while supporting disciplined execution and investment to ensure we maximise value from our existing capabilities. The strength of our people, brand and global footprint, together with our innovation and technology will support us as we emerge from the COVID-19 pandemic and implement our longer-term strategy, playing a crucial role in the world’s transition towards a net-zero carbon economy.”
In the rights announcement, Rolls-Royce highlighted its cost saving progress to date, which includes the loss of 9,000 jobs - 4,800 people having left the business by the end of August, with at least 5,000 expected by the year-end. This and other measures, Rolls says, are expected to generate total pre-tax cash savings of approximately £350m in the first half of 2020 and approximately £1bn in pre-tax cash savings in the full year ending 31 December 2020.
Rolls-Royce states: “We believe this restructuring programme, alongside an anticipated recovery in our end markets, will help us restore financial performance. Our intent remains to return the Group to positive cash flow during the second half of 2021. We are targeting reaching at least £750 million FCF (excluding disposals) as early as 2022 and we believe the longer-term prospects remain strong, with further growth in cash flow and returns expected thereafter.”
The notice, however, does include the caveat that the path to recovery depends of the timing and shape of the COVID-19 recovery, in particular the resumption of long-haul air travel.