And the UK government, through the Export Finance Program, will play its part by slapping an 80% guarantee on £ 1bn of Rolls debt for five years on condition that shareholders spit out their share; that’s on top of the £ 2 billion that already carries a state-backed label.
You could call the package a local solution – and that’s better. Chancellor Rishi Sunak has maintained his position that companies should try self-help measures first, but the Treasury has oiled the wheels by playing well on the debt side. It’s a pragmatic fudge.
It can’t be said for sure that Rolls is saved because it’s an impossible punt on infection rates, travel restrictions and vaccine development. But, on what Rolls calls its “base scenario,” the engine manufacturer has comfortable financial clearance.
The projection sees the group generate £ 750million in cash in 2022, in part as the gains from steep cost cuts and layoffs arrive. In the meantime, Rolls intends to bolster its cash resources with £ 2 billion in divestments. This would provide sufficient liquidity.
However, it was the “reasonable worst case” analysis that scared investors. Armed with new funds, Rolls is now confident that its liquidity would now survive intact even if engine flight hours – the key driver of these engine maintenance revenues – only represent 45% of 2019 levels next year. and only rise to 80% in 2022.
Investors can always worry about an unreasonably serious (unmodeled) case. But, assuming the financial package is complete, the horror scenarios of a total state collapse or bailout should be off the table for some time. There will be some medium-term strength in Rolls’ balance sheet.
Nothing that can mask the calamity in a share price was 735p this time last year and is now 117p. Even though half of Rolls’ business is in the safe territory of defense and systemic power, the damage done by the pandemic to the engine side has been extreme. A £ 2 billion rights issue is the emergency button. In retrospect, the board should have pressed him a few months ago.
Underwriting reform always seems the next step
Of course, the banks are ready to make a package out of the Rolls rights issue. The subscription and advisory fee will be £ 55million which, even when cut in multiple ways and with some going to underwriters, will keep a few investment bankers as a bonus this Christmas.
Banks will justify a rate of 2.75% for several reasons. First, the recent Hammerson and IAG fundraiser gave underwriters sweaty moments as the stock prices of both companies moved closer to rights prices; for a change, the risk of ending up with an unwanted stock was real. Second, Rolls underwriters are trapped in the US presidential election, an event that is likely to move the market.
There is force on both points. However, note how, when rights issues are launched in a time of clear skies and minimal market risk, you never hear the reverse argument of discounted sales charges. Reform to a comfortable setup always seems to stay at the next corner.
Supermarket customers don’t care, but shareholders
Ken Murphy arrives as CEO of Tesco with advice that flies at him from all sides. Selling Tesco Bank, some say, is a capital-hungry distraction. Or complete international downsizing work by cutting stores in the Czech Republic, Hungary and Slovakia. Or raise the dividend and settle down to be a reliable income stock.
Still, the biggest challenge seems obvious: how to make decent returns from online deliveries. The only near-certainties in Murphy’s time at the top of Tesco are that the online grocery market share will increase in the UK and that Amazon, which has fiddled with for years but now seems serious about expansion, will want more help.
All the supermarkets have added online capacity with impressive speed during the pandemic, including Tesco. But their stock prices are poorly rated, in part because growth seems low-margin at best. Customers don’t care, of course, but shareholders do. This is the pressing problem for a new boss.