Rolls-Royce PLC (LON:RR.) is to raise £3bn through share and debt issues to stabilise itself while it battles the effects of coronavirus on its airline customer base.
A hugely discounted rights issue priced at 32p will raise £2bn for the aero-engine maker, while a bond offering will bring in an additional £1bn, having said last month it was looking to raise £2.5bn after months of speculation about a rescue fundraising.
The engineer added it had also received commitments for a further £1bn in new loan facilities and is negotiating up to £1bn in export finance guarantees.
Rolls had already indicated a substantial financial injection was needed to help it cope with the impact of the pandemic, but the scale of the discount will still come as a shock.
The rights issue price is 75% below last night’s close of 130p with shareholders asked to stump up for 10 new shares for three existing, with a theoretical ex-rights price of 54.6p. Two years ago the shares changed hands for almost 1,100p.
Roll's chief executive Warren East said the funding was part of a programme to restructure the company fundamentally.
The company has already announced 9,000 job cuts to help stem its cash outflow during the crisis.
COVID-19’s impact on the commercial aviation industry had led to a sharp deterioration in the financial performance of Rolls’ Civil Aerospace business and Power Systems business, East said in a statement today.
"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."
The shares fell over 9% to 117.27p on Thursday morning, near an 18-year low.
“Once seen as a shining light for British business and for engineering worldwide, Rolls-Royce has had to stomach major problems with the Trent 1000 engines in recent years and Covid-19 just added to the pressure," said analysts at AJ Bell.
“The market has been fearful about the company’s prospects given significant disruption to the aviation industry, meaning demand would be hit for both engines and maintenance.”
They added: “Investors taking part in the share and bond issue need to have considerable faith in the aviation industry getting back on its feet. Handing over money now to back Rolls-Royce would also require considerable patience as this is unlikely to be a rapid recovery story.
“There are two factors to consider – the first is how long it will take for demand to return for plane travel. Airlines need to see sales improve to restrengthen their balance sheets. And that leads to the second factor – in general they can’t think about ordering new planes, and therefore engines, until they are in a much stronger position financially.
“It could be long waiting game for Rolls-Royce, hence the need to boost its liquidity now to see it through potentially three or four years of further depressed activity.”
--Adds shares and broker comment--