Watch: Rolls-Royce asks shareholders for £2bn to deal with COVID-19 hit
Shares of troubled engine manufacturer Rolls-Royce (RR.L) hit a 17-year low on Thursday after the company announced plans to raise £5 billion ($6.5 billion) in debt and equity to shore up its balance sheet.
Rolls-Royce announced the plans, which include a deeply discounted share offering, in a statement Thursday. The funds will be used to repair the company’s balance sheet from the hit caused by the COVID-19 pandemic.
Rolls-Royce is seeking to raise £2bn by selling new shares to investors in a 10-for-3 rights issue. The issue, which comes at a 41% discount, is fully subscribed .
Separately, the company plans to raise up to £3 billion in debt. Rolls-Royce plans to issue a new £1bn bond, has negotiated a new £1bn term loan and has government backing Export Finance to extend an existing loan by £1bn of five years.
Rolls-Royce said the fundraising measures were necessary to reduce balance sheet leverage and improve liquidity. The extra cash should help the company “address macroeconomic risks”.
“We are taking decisive and transformative action to fundamentally restructure our operations, significantly reduce our cost base and improve our financial position,” Chief Executive Warren East said.
“The capital increase announced today enhances our resilience to navigate the current uncertain operating environment.”
The company’s shares fell more than 10% on the announcement, falling to their lowest level since mid-2003.
The COVID-19 pandemic has devastated Rolls-Royce’s business. Much of its revenue comes from manufacturing aircraft engines, but the collapse in aviation since the pandemic has led to a drop in sales.
Rolls-Royce lost £5.4billion in the first six months of the year and announced plans to cut 9,000 jobs worldwide in response. The company doesn’t expect air travel to rebound for several years and only expects a return to positive cash generation by 2022.
“The sudden and significant effect of the COVID-19 pandemic has had a significant impact on the commercial aviation industry, resulting in a sharp deterioration in the financial performance of our Civil Aerospace business and, to a lesser extent, our Power Systems business,” East said Thursday.
Susannah Streeter, senior investment and market analyst, Hargreaves Lansdown, said the rights issue was ‘the least worst option to help her cope with the crushing impact the pandemic has inflicted on her core business’ .
“The aircraft manufacturer is in a grim position given the collapse of international air travel,” Streeter said.
“There is little end in sight for the decline in demand for new aircraft and it has already lost assets and announced massive job losses.”
Investors will vote on whether to approve the capital increase at a meeting on October 27.