A big cash call is needed to prop up the business, but what does it mean for shareholders?
The £11 billion decimation of Rolls-Royce (LSE:RR.) shares since the start of the Covid-19 crisis was put into sharp focus today when the engines giant unveiled a cash call at just 32p a share.
The 10-for-3 rights issue will raise £2 billion as part of £5 billion of additional liquidity the company is seeking to shore up its balance sheet and find a path through the uncertainty.
Morgan Stanley believes the package unveiled today should more than adequately address questions around the company's financial position, particularly given that the US bank's base case forecast now points to liquidity of £7 billion by the end of 2021.
Rolls shares still fell another 11% to 115p as investors digested details of the dilutive offering, which has been priced at a 41% discount to the theoretical ex-rights price of 55p.
A theoretical ex-rights price, or TERP, is the ‘theoretical’ price at which a share will trade following a rights issue. This happens because more shares have been issued, usually at a much lower price to make them attractive to buyers. This needs to be reflected in the share price once the fundraising is closed. The size of dilution will be influenced by the number of rights issue shares acquired during the cash call.
The shares had been trading at near to 700p in February, valuing the company at £13.5 billion, but are now at a 17-year low worth about £2.5 billion after the loss of income from airline flying hours caused cash to haemorrhage from the business.
Short-sellers have also driven down the price after taking advantage of the long gap between today's announcement and the company revealing it was looking to raise capital.
Its half-year results in August revealed a bottom-line loss of £5.4 billion, with investors further spooked by a “severe, but plausible, downside scenario” under which a second wave of Covid-19 would leave Rolls needing to draw down a £1.9 billion revolving credit facility.
Analysts have previously said they fear that net debt could peak at £5 billion by the end of 2021. Morgan Stanley now estimates debt could be reduced to £1.5 billion in 2022 under today's plan.
The company itself remains hopeful that the actions taken so far, including plans for a major restructuring programme costing 9,000 jobs, can return it to a positive cash flow position during the second half of next year before achieving strong cash generation in 2022.
Outflows continued in July and August, although they were at reduced levels compared to the first half and modestly better than the company's own expectations. The current forecast is still for a full-year outflow of £4 billion, with the pathway to a recovery heavily dependent on the shape of the Covid-19 pandemic, particularly in relation to how it affects long-haul travel.
Rolls said there had been no material change in its trading outlook since the August results, with the civil aerospace and ITP Aero businesses continuing to see the largest impact.
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The fully underwritten rights issue is subject to shareholder approval on 27 October before dealings in the nil paid rights begin a day later. The deadline for acceptances is 11 November.
Alongside the £2 billion cash call, the company is planning to raise at least £1 billion from a bond issue. It also disclosed it has commitments for a new two-year term loan facility of £1 billion and support from UK Export Finance for a £1 billion extension to the 80% guarantee on an existing £2 billion five-year loan.
Rolls CEO Warren East said he was taking “decisive and transformative” action.
He added: “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.”
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