Rolls-Royce set to tap investors for £2.5bn as shares near 16-year low
Rolls-Royce is on the cusp of launching an emergency fundraising to tap shareholders for between £2billion and £2.5billion.
City sources said the FTSE100-listed jet engine maker is close to securing the funds from investors, possibly through a rights issue and placing.
Goldman Sachs and Morgan Stanley are believed to be among the investment banks working on the fundraising deal for Rolls-Royce.
Emergency: City sources said the FTSE100-listed jet engine maker is close to securing the funds from investors
It had been thought Rolls-Royce may look to raise £1.5billion from investors. But sources claimed the blue chip firm is now seeking an extra £500million to £1billion, possibly from sovereign wealth funds.
The move to launch such a large rescue fundraising comes as Rolls-Royce shares – which closed last week at £1.80 – flirt with a 16-year low amid concerns about the company’s financial position.
Investment bankers last month told The Mail on Sunday that they had heard rumours the Government was ‘starting to get worried’, raising the possibility of state intervention.
Rolls-Royce – in which the Government has a ‘golden share’ that gives it the right to block a takeover – has been hit hard by the pandemic. In part that has been because the company operates a power-by-the hour model, where it sells engines at a loss and later receives payments according to how much they fly. This arrangement has left the company bleeding cash.
The firm is also particularly exposed to the collapse in long-haul travel because it makes engines for bigger planes such as Boeing’s 787 Dreamliner and Airbus’s A350.
Rolls-Royce’s debt has been downgraded to junk status and major long-term shareholders, such as American activist ValueAct Capital, have been selling out of the company.
In a note to clients several weeks ago, David Perry, an analyst at JP Morgan, said: ‘An £8billion hole will need much more than a £1.5billion rights issue. We believe RollsRoyce needs to raise at least £6billion [through equity raise sales and disposals] to put itself on a sound financial footing.’
Perry added that the company’s debt pile will be almost £19billion by the end of the year. He believes that £1.5billion may not be enough to save the firm.
The analyst suggested that Rolls-Royce needs to issue £6billion of equity and this might not be possible by just relying on institutional investors. ‘We think there is a high chance of Government intervention,’ he added.
Aside from tapping stock market investors for fresh cash, Rolls-Royce is also seeking to generate about £2billion from selling divisions – including ITP Aero – over the next 18 months.
ITP Aero is Rolls-Royce’s Spanish engineering division that makes turbine blades for engines.
A spokesman for Rolls-Royce said: ‘We continue to review a range of funding options to further strengthen our balance sheet.
‘These could include debt and equity, but no final decisions have been taken. We have already taken swift action to strengthen our liquidity with £6.1billion at the end of the first half of the year and a further £2billion term loan agreed in the second half.
‘We have also announced £1billion of cost mitigation activity in 2020 and launched a re-organisation of our Civil Aerospace business to save £1.3billion annually.’
Last month, the firm’s woes were compounded by the announcement that finance chief Stephen Daintith was leaving the business for online delivery firm Ocado.
Daintith has said he will stay for a transition period.