Rolls-Royce Pads Coffers With $2.5 Billion Loan
(Bloomberg) -- Rolls-Royce Holdings Plc warned it will take years to bounce back from the coronavirus crisis that’s idled global jetliner fleets and robbed the engine maker of vital maintenance revenue.
Shares of the London-based company slid as much as 9.5% Thursday after the London-based company said it would borrow an added 2 billion pounds ($2.5 billion) to help see it through the downturn.
Aircraft powered by the company’s turbines logged a 75% drop in flying hours in the second quarter as governments locked down travel, reducing demand for maintenance services that provide the bulk of profit. Rolls-Royce is particularly exposed because it only makes engines for wide-body jets that handle the bulk of long-haul routes, which are expected to remain subdued for years.
“The Covid-19 pandemic has created a historic shock in civil aviation which will take several years to recover,” Chief Executive Officer Warren East said in a statement.
On a conference call, East said Rolls-Royce’s commercial aerospace activity will be about one-third smaller. The company will pare back its dollar-hedging by 10 billion pounds, or 27%, through 2026 to reflect the lower demand levels for its sales, which are mostly in dollars.
It’s unlikely Rolls-Royce will soon have the chance to get back into the market for narrow-body turbines, he said.
“It’s a slightly moot point because there are no single-aisle opportunities likely to materialize in the current decade,” the CEO said.
Rolls-Royce has time to plot moves to strengthen its balance sheet while it rides out the crisis, East said. The company obtained a commitment for the new five-year loan, which will be underwritten by a syndicate of banks and backed by a guarantee from U.K. Export Finance.
The extra borrowing will lift liquidity to 8.1 billion pounds and comes on top of other moves to bolster the balance sheet. Rolls said Sunday it aims to close a pension plan four years early, while it’s said to be exploring measures including a share sale and asset disposals.
“We started this year with positive momentum and strong liquidity and acted swiftly to conserve cash and cut costs,” East said.
Shares of Rolls-Royce traded 7.8% lower as of 10:13 a.m. in London, taking the decline so far this year to 61%.
The company may decide on an equity raise, but the liquidity now available means it can avoid doing so “against the uncertainty of a volatile trading backdrop and febrile sentiment,” according to Jefferies analyst Sandy Morris.
Rolls-Royce expects to make two-thirds of its announced 9,000 global job cuts this year, East said. The company will prioritize voluntary measures but there will be some dismissals, he said.
Rolls-Royce opened voluntary severance to U.K. staff last month after announcing plans to eliminate 3,000 jobs in the country this year. It’s had expressions of interest from more than that number, with about 2,000 of those positions expected to go by August.
The company expects the cash-flow situation to ease in the second half, with an outflow of 1 billion pounds versus 3 billion pounds in the six months through June. There are early signs of a recovery in flying hours with a marginal improvement in May and June, it said.
Fixes for Trent 1000 engine glitches which have plagued the company for years are on track, it said.
The warning from Rolls-Royce about prospects for the industry adds to grim evidence that the fallout from the grounding of planes worldwide is hurting suppliers around the globe.
French rival engine maker Safran SA, a supplier to Airbus and Boeing Co., is shedding around 13,000 jobs worldwide. Chairman Ross McInnes said last week he doesn’t expect the aviation industry to recover before 2023 or 2024.
In all, European aerospace manufacturers have set plans to eliminate some 33,000 jobs since the pandemic hit, based on a Bloomberg tally.
©2020 Bloomberg L.P.