Goldman Sachs and Morgan Stanley, two of the top banks that advised the board on the £ 5bn debt and equity fundraiser unveiled on Thursday, cut their exposure in half at the end of last week, multiple sources said.
The timing for the rights issue was “not ideal,” said a person familiar with the situation, alluding to President Donald Trump’s recent refusal to engage in a peaceful transfer of power if he lost power. US presidential election. “It’s clearly a major risk if this guy [President Donald Trump] will 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 no one will be flying long distances for three to four years,” he added.
Rolls-Royce, along with the rest of the aerospace industry, has suffered a slump in revenues and a substantial outflow of cash due to a virtual shutdown of global aviation due to the pandemic.
The banks, together with real estate broker Jefferies, had pledged to guarantee 60% of the 6.4 billion new shares to be issued during the 10-for-three cash call. The total is now closer to 30 percent, according to two sources.
However, Rolls-Royce is still guaranteed to raise funds after BNP Paribas, HSBC and Citi, all involved in the £ 3 billion debt package also announced on Thursday, joined them as major underwriters to bridge the gap. shortfall.
Rolls-Royce said, “We are very pleased with the support we have received from a strong consortium of banks for our debt financing and fully subscribed rights issue.”
BNP, which has ambitious plans to become the dominant force in the European investment bank, edged Goldman Sachs to become the largest underwriter with around 20% of the underwriting, sources say.
Underwriters are expected to earn up to £ 55million in fees, out of an estimated total cost of the rights issue of £ 80million. Morgan Stanley, Goldman Sachs and BNP declined to comment.
In addition to the rights issue, in which the new shares will be valued at 32 pence each, Rolls-Royce has announced plans for a bond issue of at least £ 1 billion, a new term loan facility from two years of £ 1billion and an agreement in principle from the UK export finance agency will secure an additional loan of £ 1bn on top of the £ 2bn granted in July. The rights issue is due for shareholder approval later this month.
Around £ 3.2bn of the company’s existing debt matures next year, prompting it to refinance.
Warren East, chief executive, said the measures represented a “comprehensive package that will take the issue of liquidity off the table during this crisis.” This is a last step in repairing the damage done to the balance sheet. ”
Investors praised the combination of debt and equity, saying it was the right structure to get Rolls-Royce through a prolonged downturn.
Still, some have been baffled by the timing of the cash call, as stocks have fallen 84% since February. They closed 10% lower at 116.8 pence on Thursday, down from just under £ 7 in mid-February.
“They should have done [the recapitalisation] either much sooner or much later, ”said one of the main long-term investors. “I’m disappointed with the timing.” Still, the investor remains confident in the group’s medium-term business model and will support the rights issue, he said.
Bankers said the delay had increased the discount on stock prices as the process would now drag through the volatile election period in the United States.
Another prominent shareholder said that the sharp drop in stocks in recent months meant that there was now a gap between the value of Rolls-Royce’s non-aerospace divisions and market perception, even after the fundraiser. He also intends to exercise his rights.
Rolls-Royce shares on Thursday – they were just under £ 7 in mid-February
Mr. East defended the timing of the fundraising. “We could have launched a rights show in April,” he told the Financial Times. “But the discussion was that we can’t go directly to the shareholders; we need to be self-help. I couldn’t come up with a bunch of powerpoints saying we were going to restructure.
The group had acted quickly to conserve cash, raising billions of additional cash in the depths of the crisis and taking steps to achieve £ 1.3bn in savings by mid-2021 through 9,000 cuts. jobs to reduce its civil aerospace activities by a third.
Credit bureaus, which demoted Rolls-Royce’s debt to junk earlier this year, welcomed the fundraiser, but warned it was still a long way from returning to investment grade.
Martin Hallmark, senior vice president and senior analyst, Rolls-Royce at Moody’s, said there are still “downside risks to future cash flows, including the realization of cost reductions and the evolution of the market. market recovery, [which] the liquidity margin remains uncertain ”.