Rolls-Royce to raise £5bn to prop up its finances amid falling engine demand

Funding only offers 'temporary reprieve' for the troubled aerospace company, analysts warn

A Rolls Royce Trent XWB engine in a factory in Derby, central England. Aircraft engine specialist Rolls-Royce had previously pulled out of talks for Boeing's NMA, saying its engine was not likely to bShow more

Rolls-Royce Holdings is looking to generate £5 billion ($6.44bn) in new financing as the troubled aerospace company looks to bolster its balance sheet amid falling demand for the planes its engines power.

The London-based jet-engine maker said the debt-financing package to raise about £2bn in equity from a rights issue and a further £3bn in bonds and loans is part of a bid to restructure its operations and improve its financial position as the company grapples with the economic effects of Covid-19.

“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,” Warren East, chief executive of Rolls-Royce, said in a statement on Thursday.

“The capital raise ... 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.”

Britain's best-known engineering company, which also makes engines for ships and powers the UK's nuclear submarines, has been badly hit by the economic fallout from the Covid-pandemic because airlines pay the company according to how many hours its engines fly. Dwindling demand for the wide-body planes its engines power, such as the A380, has seen the maintenance revenue the company collects from operating the jets almost disappear. It recorded a post-tax loss of £5.4bn in the first half of 2020.

The company implemented a series of cost-cutting measures, including 9,000 jobs cuts, in March which generated pre-tax cash savings of £350 million in the first half of 2020, with £1bn in savings expected by the end of the year.

“The stark reality is that Rolls-Royce has already burned through so much cash this year and this additional funding and debt-tied finance really only buys the company modest time," said Saj Ahmad, chief analyst at Strategic Aero Research.

"Critically, this funding doesn’t really change the challenges faced by Rolls-Royce. This is a temporary reprieve and I fear that we could see the company have to address its financial situation within six to 12 months all over again, particularly if air travel remains slammed into the ground as it has been since March 2020."

Under the heavily discounted £2bn rights issue, the company will issue 6.4 billion of new ordinary shares at £0.32 each to investors, which is fully underwritten. The rights issue is subject to shareholder approval at a general meeting on October 27.

Referring to the jobs cuts, Rolls-Royce said 4,800 people  "left the business" by the end of August with at least 5,000 cuts by the end end of the year.

"This restructuring, the largest in the Group's history, is intended to deliver a total annual pre-tax cash saving of at least £1.3bn by the end of 2022," Rolls-Royce said.

While reducing headcount and restructuring will over time deliver better cost savings and trim overheads, "these factors are only realised years after changes are enacted and so, the results aren’t immediate or seen overnight" Mr Ahmad said.

Last month, Rolls-Royce unveiled plans to sell its Spanish unit ITP Aero and other assets in a move to raise at least £2bn, while earlier this month there was talk the company was in talks with sovereign wealth funds, including Singapore’s GIC, that it was looking to raise £2.5bn in a rights issue.

Rolls-Royce confirmed on Thursday it had received an indication of support from UK Export Finance for an extension of its 80 per cent guarantee to support an increase of the company’s existing £2bn five-year term loan of up to £1bn – subject to the completion of the rights issue.