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Rolls-Royce seeks taxpayer help in £5bn rescue plan

Oliver Gill
·4-min read
Rolls engine
Rolls engine

Rolls-Royce is seeking taxpayer support as part a £5bn rescue package after a collapse in air travel plunged the aerospace titan into its worst crisis since bankruptcy in the 1970s.

The FTSE 100 stalwart - one of Britain's last great engineering firms - has agreed a £1bn extension to a loan guarantee from Westminster after announcing a £2bn rights issue from shareholders. A further £2bn will be raised from banks and bondholders.

The total cash being secured is more than double Rolls' £2.3bn market value following an 83pc share slump since the start of the year - but some analysts have questioned if even this will be enough.

Shares dropped another 10.2pc to a 17-year low of 116.8p after the rescue plan was announced.

Banks including BNP Paribas and HSBC are understood to have taken part in the cash call, while Goldman Sachs is advising Rolls-Royce’s board, which is chaired by Sir Ian Davis.

Boss Warren East said that the coronavirus pandemic had been “a recipe for haemorrhaging cash” and warned the firm will not return to profit until the second half of next year, despite announcing 9,000 job cuts as part of a brutal drive to slash costs. Rolls sank to a record £5.4bn loss in the first half of 2020.

Many in the City have raised fears over how Rolls will navigate the current crisis given that half of its business relies on air travel.

The engineering firm, whose predecessor firm fell into liquidation nearly 50 years ago, was linked with a direct taxpayer bailout earlier this year but no help emerged.

Meanwhile, plans to tap Kuwaiti and Singapore sovereign wealth funds for cash were vetoed by existing investors who feared the value of their stakes woulds fall as a result.

Mr East said the £5bn cash injection addressed “all these questions and debates about whether Rolls-Royce is going to run out of money in this crisis”.

He said: “The intention is to [take] all that uncertainty off the table.

“When we come out of this crisis, and we will do so, we are going to have a balance sheet with a lot of debt on it. So we are going to have to repair that balance sheet.

"So the £2bn of equity, as well as unlocking the debt for liquidity right now, also is a major step towards repairing that balance sheet.”

Roughly half of Rolls-Royce’s business is in making aircraft engines.

It earns money from sales and by charging a fee for every hour the planes are flying, meaning a Covid collapse in air travel has left the company on its knees. Rolls was expecting to run out of cash in the second half of next year without emergency support.

Mr East said: “We could just go and borrow a load more money, but actually, we have already borrowed some more money and we can’t afford to put the business at too much risk.”

The company has already announced plans to raise £2bn from selling some divisions, including one that makes parts for the Eurofighter Typhoon. The company does not expect to break even until the second half of next year, Mr East said.

Rolls-Royce announced plans to axe 9,000 jobs in May. Although the company's chief executive said the company was not planning further redundancies, he could not rule out another wave of cuts if the situation worsened.

He said: “We can never say never.

“If you get into prolonged, what you might call unreasonable worst cases, then we may have to do some further restructuring. But we don’t have any plans for more major restructuring.”

Martin Hallmark, an analyst at ratings agency Moody’s said Thursday’s capital raising would “substantially improve” Rolls-Royce’s cash reserves.

However, he warned that doubts remain about the “delivery of cost savings and the evolution of market recovery”, suggesting that the £5bn injection still may not be enough.

Shareholders can either buy new shares on a 10 for 3 basis or have their stake diluted in the rights issue, which must be approved by investors at a meeting on Oct 27.

The new shares will be priced at 32p, a 41pc discount to Wednesday's 130p closing price.