(Guardian) – Aircraft engine-maker Rolls-Royce has revealed plans to shore up its balance sheet by £5bn through a shareholder cash-call, a bond issue and new loan agreements.
The company said it would tap shareholders in a £2bn rights issue and raise more debt through a £1bn bond offering, a new two-year loan of £1bn and a further £1bn loan that would be 80% backed by the government’s UK export finance agency (UKEF).
It follows days of speculation and share price falls at the manufacturer, which has lost 80% of its value since January and has a current market capitalisation below £2.5bn.
Shares fell again during morning trading on Thursday, sliding 10% to a 17-year low below 120p.
Rolls-Royce said its rights issue is fully underwritten, and is offering a 41% discount, with the company planning to issue 10 new shares for every three existing shares. .
In addition, the group has agreed a new two-year loan facility worth £1bn, conditional on completing the equity raise.
The company said it has also gained support in principle from UKEF to extend its 80% guarantee for a potential £1bn increase of the firm’s existing £2bn loan.
The Derby-based engineering firm said the measures are designed to improve its liquidity and reduce the debt on its balance sheet. It added that it does not expect to generate cash again until 2022.
Rolls-Royce has been hit hard by the impact of Covid-19 on its civil aviation business, and in August it reported a record £5.4bn loss for the first half of the year.
The company said it expects to have burned through £4bn in cash by the end of 2020.
Demand for its engines has slumped, and the group is in the middle of the largest restructuring in its history, cutting 9,000 jobs globally and closing several production sites.
It is also looking to sell assets to raise at least £2bn, including the Spanish engine maker ITP Aero.
Rolls-Royce’s chief executive, Warren East, said: “We are undertaking decisive and transformative action to fundamentally restructure our operations, materially reduce our cost base and improve our financial position. The capital raise announced today improves our resilience to navigate the current uncertain operating environment.”
Ahead of the announcement, Rolls-Royce had come in for criticism from some of its shareholders for its perceived delay in announcing the details of its cash-call.
Warren East said the company had wanted to put together an “integrated package” including raising equity, fresh debt and loans.
“It was important we got other elements of the package in place before running to the equity market,” said East. “We could sit this out for another six months, but that would give us serious issues around going concern. We know the debt and equity markets are open now and we don’t know if they will be.”
Rolls-Royce has predicted it would take until 2025 for aircraft engine orders to return to pre-Covid levels, and said its path to making money again remains dependent on the timing and shape of the economic recovery from the pandemic.
“The market has been fearful about the company’s prospects given significant disruption to the aviation industry,” said Russ Mould, investment director at stockbroker AJ Bell.
“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.”