Rolls-Royce taps investors and lenders for billions to keep it rolling – don’t expect a quick payoff

Engine problems, Brexit and the pandemic have all contributed to the woes of a company, writes Jim Moore

Rolls Royce needs long-haul flights to recover for its shares to fly again

It’s sobering to realise that in the summer of 2018 Rolls-Royce shares closed at just under £11. 

Since they’ve done a decent impersonation of a flaky dot-com whose tech is running out of road.

A £5bn recapitalisation, to which shareholders are going to contribute £2bn through the issue of new paper on the basis of 10 new shares for every three held, could leave them trading at less than 60p when the dust has settled and all that new equity has reached the market.  

The slide was underway before the pandemic emerged. Rolls’ Trent 100 engine has faced durability and reliability problems. The cost of fixing them? Just shy of £2.5bn when all is said and done.

Then there is, of course, Brexit, the (potential) carmaker killer that casts a shadow over the entire manufacturing sector.

The latest set of Purchasing Managers Index figures showed it is growing, at 54.1 with anything above 50 indicating growth.

But that’s below August’s two-and-a-half year high of 55.2, and comes against a backdrop of months of falling headcount, even with Rishi Sunak’s furlough scheme still in operation.

Rolls is, naturally, among those to have axed jobs.

The engine problems, the stuttering Brexit trade talks, the mess that looks set to emerge at the UK’s borders even with a goodish outcome, have all contributed to the woes of a company that set the gold standard for British engineering but was showing some tarnish before the pandemic hit.

Nonetheless, the coronavirus has put those other problems in the shade, crippling the global aviation industry, and thus Rolls’ aviation business, while hurting the power systems division to a lesser extent. The company wouldn’t have had to go cap in hand to its shareholders, and lenders, including UK Export Finance, without it, at least not to the extent that it has.

Where it gets interesting is the talks the company was reportedly holding with sovereign wealth funds from Asia and the Middle East about contributing to the cash call.

Companies like having these institutions on their shareholder registers because they tend to be supportive long term backers, which don’t tend to kick a fuss up about things like executive remuneration.

But their support comes at a price and it seems that it was too rich for the company’s existing shareholders to stomach.

The spectre of Barclays, which brought them in at very generous terms that weren’t offered to other shareholders, with a view to avoiding a UK government bailout during the financial crisis, may have influenced their thinking.

To avoid getting stiffed, and to keep Rolls Royce rolling, their only option was therefore to pay up.

They will have to wait some time to see much in the way of a return on the funds they have committed.

Rolls boss Warren East made the point that the investment phase as regards the engines is largely done. He held upon the prospect of a nice “annuity” income in the future. Trouble is, this does rather depend on the recovery in the long haul flights which Rolls’ engines power. They aren’t expected to bounce back at anything like the pace of shorter hops.

Airlines have seen their balance sheets ravaged just as Rolls has. They’re unlikely to be ordering new planes, and thus new engines, until they absolutely have to.

So investors will have to sit tight. Learning the virtue of patience could be good for them.

What they really need, what Rolls and the entire sector really needs, is for one or another of the various vaccine trials to bear fruit. That’s the unicorn everyone’s trying to spot.