Rolls-Royce to Raise $6.5 Billion After Engine Demand Collapses

(Bloomberg) -- Rolls-Royce Holdings Plc unveiled a long-awaited financing plan, targeting up to 5 billion pounds ($6.5 billion) of fresh capital to buttress the U.K. jet-engine-maker against an historic aerospace downturn that still has years to go.

The London-based company will tap existing shareholders for 2 billion pounds in a rights issue, and is seeking a further 3 billion pounds in bonds and loans, it said in a statement Thursday. Rolls-Royce shares fell as much 12%, extending a two-year decline, while its euro bonds jumped by the most since they were issued.

The funding is aimed at seeing Rolls-Royce through to 2022, when it expects to resume strong cash generation. Chief Executive Officer Warren East, who has been working on it for months, sought to reassure investors that the plan would suffice. He said the package, which includes some U.K. backing, would give the company breathing room to sell assets as he repositions to focus more on defense and power systems, as well as sustainable aircraft propulsion.

“It’s probably the most difficult period the global aviation sector has faced in peace time,” East said on a conference call. “Unprecedented times call for unprecedented action.”

Rolls-Royce has been one of the biggest casualties in a sector hard hit by the coronavirus crisis, which has sharply curtailed the market for long-distance travel. It’s flattened demand for the wide-body planes that use its turbines, while grounding swaths of existing fleets that provide vital maintenance revenue.

Shares of Rolls-Royce traded 11% lower to 116.20 pence as of 1 p.m. in London. They are down 83% this year.

Months of Talks

Speculation about the company’s financing plans has been rife for months, with the share-price drop accelerating since early July, when Bloomberg reported that East was considering raising more equity. Talks to draw in sovereign funds as investors were abruptly dropped after shareholders objected to dilution.

Rolls-Royce aims to sell 1 billion pounds in bonds and it’s got commitments for a two-year term loan for the same amount, contingent on the equity raise. The company also said it has U.K. Export Finance backing for a 1 billion-pound increase in an 80% guaranteed credit line.

On Thursday, East faced questions on why the company hadn’t acted sooner. He said now was the “right time,” as the company has made progress on its wider restructuring plans.

“It’s important we don’t run for the equity markets without getting the self-help measures in place,” he said. “We couldn’t possibly ask our shareholders to shoulder all of the burden.”

Jefferies International analyst Sandy Morris said in a note that investors have generally focused on worst-case outcomes for Rolls but that the multi-element refinancing represents an “holistic package.”

The funding plans:

• A 10-for-three rights issue, which will come at a 41.4% discount to Wednesday’s closing price, has been fully underwritten
• A 1 billion-pound bond offering will proceed in the near future
• Contingent on completion of the equity offer, Rolls said it also has commitments for a two-year term loan of 1 billion pounds
• U.K. Export Finance has indicated backing for an extension of its 80% guarantee to support a 1 billion-pound increase in an existing loan, subject to completion of the rights offer

The fundraising would boost Rolls-Royce borrowings to almost 16 billion pounds, according to data compiled by Bloomberg and company announcements. BNP Paribas SA, Citigroup Inc. and HSBC Holdings Plc are coordinating the company’s bond offering and new term loan facility, according to people familiar with the matter.

Read: BNP, Citi, HSBC Lead Rolls Royce’s $2.35 Billion Debt Offer

The package is based on a worst-case projection where a second wave of the coronavirus leads to a slower recovery, East said. The financing should “take any liquidity questions off the table” through the crisis, he said, adding that Rolls-Royce doesn’t have any plans to seek a bailout from the U.K. government, owner of a so-called golden share.

Uphill Road

Early indications show that engine-flying hours for September were “not too bad,” East said. He still sees growth in the wide-body engine market, though it won’t recover until 2025.

The CEO is still targeting a “step change” in performance at the civil aerospace business, a goal that’s eluded him since he took the reins in 2015. Just before the virus hit, Rolls-Royce expressed optimism it was beginning to turn the page on engine-quality issues that had blighted profits and soured relations with customers.

Even as it picks its way through the crisis, the company faces an uphill road.

Investment in new aircraft is set to remain suppressed, and the recovery in air travel is likely to focus on shorter trips using smaller planes -- a market where Rolls-Royce doesn’t compete. Significant investment will also be needed to prepare for new technologies as aerospace seeks more sustainable sources of power.

“We think that the long-term prospects remain strong,” East said. “Our immediate focus is to strengthen our financial position and return to positive cash flow.”

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