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Top advisers on Rolls-Royce’s £ 2bn rights issue at deep discounts slashed their underwriting commitments to the aircraft engine maker’s cash call over concerns about the pandemic and market volatility in the lead-up period. to the American elections.
Goldman Sachs and Morgan Stanley, two of the top banks that advised the board on raising the £ 5bn debt and equity fundraising disclosed Thursday, cut their exposure in half late last week, multiple sources said.
The timing of the rights issue “was not ideal,” said a person close to the situation, alluding to President Donald Trump’s recent refusal to commit to a peaceful transfer of power if he loses the US presidential election. “Clearly, it’s a big risk if this guy [President Donald Trump] he’s going to go crazy. ”
The outlook for aviation, and in particular the long-haul market served by Rolls-Royce, had deteriorated in recent months. “It is clear that nobody will fly long distances for three or four years,” he added.
Rolls-Royce, along with the rest of the aerospace sector, has suffered a collapse in revenue and a substantial cash outflow due to a virtual shutdown of global aviation as a result of the pandemic.
The banks, along with house broker Jefferies, had pledged to subscribe for 60 percent of the 6.4 billion new shares that will be issued in the 10-for-three cash call. The total is now closer to 30 percent, two sources said.
However, Rolls-Royce is still guaranteed to raise the funds after BNP Paribas, HSBC and Citi – all involved in the £ 3bn debt package also announced Thursday – stepped in to join together as major underwriters to offset the deficit.
Rolls-Royce said: “We are very pleased with the support we have received from a strong consortium of banks for our debt financing and issuance of fully subscribed rights.”
BNP, which has ambitious plans to become the dominant force in European investment banking, surpassed Goldman Sachs to become the largest underwriter with about 20 percent of the underwriting, the sources said.
Underwriters can earn up to £ 55 million in fees, out of the total estimated cost for issuing rights of £ 80 million. Morgan Stanley, Goldman Sachs and BNP declined to comment.
In addition to the rights issue, in which the new shares will be priced at 32 pence each, Rolls-Royce announced plans for a bond issue of at least £ 1 billion, a new two-year loan facility from £ 1bn and an agreement in principle by the UK export finance agency to guarantee an additional £ 1bn loan on top of the £ 2bn granted in July. The rights issue must be approved by shareholders at the end of this month.
About £ 3.2bn of the company’s existing debt is due next year, putting it under pressure to refinance.
Warren East, CEO, said the measures represent a “comprehensive package that will eliminate the issue of liquidity during this crisis. This is a final step to repair the damage done to the balance sheet. “
Investors welcomed the combination of debt and equity, saying it was the right structure for Rolls-Royce to weather a protracted recession.
However, some were puzzled by the timing of the cash call, as the stock had fallen 84 percent since February. They closed 10 per cent at 116.8 pence on Thursday compared to just under £ 7 in mid-February.
“They should have done [the recapitalisation] either long before or long after, ”said one of the leading long-term investors. “I am disappointed with the moment.” Even so, the investor continued to trust the group’s business model in the medium term and would be supporting the issuance of rights, he said.
Bankers said the delay had increased the discount on the share price, as the process would now drag itself through the volatile US election period.
Another leading shareholder said the stock’s sharp decline in recent months meant there was now a gap between the value of Rolls-Royce’s non-aerospace divisions and market perception, even after the fundraiser. It is also intended to enforce your rights.
116.8p
Rolls-Royce shares on Thursday: They were just under £ 7 in mid-February
East defended the timing of the call in cash. “We could have launched a rights issue in April,” he told the Financial Times. “But the discussion was that we cannot go directly to the shareholders; we need to show some self-help. I couldn’t come up with a bunch of powerpoints saying we’re going to restructure. “
The group had moved quickly to save cash, raising billions in additional liquidity in the depth of the crisis and taking steps to generate £ 1.3 billion in cost savings by mid-2021 through 9,000 job cuts to reduce its business. civil aerospace by one third.
Credit bureaus, which downgraded Rolls-Royce’s debt to junk earlier this year, welcomed the fundraising but cautioned that it was still a long way from returning to investment grade.
Martin Hallmark, Rolls-Royce Senior Vice President and Principal Analyst at Moody’s, said there were still “downside risks around future cash flows, including the delivery of cost savings and the evolution of the market recovery, [which] the average liquidity margin remains uncertain ”.
