Rolls-Royce Group (LSE: RR) has been one of the worst hit FTSE 100 companies in the 2020 stock market crash. Rolls makes much of its profit from maintenance, repairs, and parts contracts for its engines. And with the Civil Aviation business almost destroyed by the Covid-19 pandemic, much of that has dried up. The Rolls-Royce share price is now down over 80% since the start of the year, which is scary.
Refinancing was clearly on the cards. And, on Thursday, Rolls revealed a plan to raise at least £3bn. And it might rise as high as £5bn. The initial market reaction was less than enthusiastic. The Rolls-Royce share price lost 5% in early trading.
Part of the new funding will come as a fully underwritten 10 for 3 rights issue. That should raise approximately £2bn. In addition, there’ll be a bond offering to raise at least £1bn. Rolls is also negotiating a new two year term loan facility of £1bn. And it has support in principle from UK Export Finance “an extension of its 80% guarantee to support a potential increase of the company’s existing £2bn five year term loan of up to £1bn.“
Rolls-Royce share price discount
Rolls is pricing the new shares at 32p, a 41.4% discount “to the theoretical ex-rights price per existing ordinary share” based on 30 September. That Rolls-Royce needed to offer such a big discount to offload the new shares doesn’t exactly fill me with optimism. It suggests to me investors are still fearing significant downside potential.
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 big question is, would you buy now at the current Rolls-Royce share price? I wouldn’t, and I’ll tell you why.
For the first half of the year, Rolls-Royce reported a pre-tax loss of £5.4bn. At the time, the company’s balance sheet was suffering too. From a net cash position of £1.4bn, we saw a slump to net debt of £1.7bn. A free cash outflow of £2.8bn lay behind that, and Rolls expected that figure to rise to around £4bn for the full year.
More capital needed?
Against that position, all this new cash perhaps doesn’t look like such a huge amount after all. Though some analysts are more optimistic, Rolls-Royce itself has said it doesn’t expect to see positive cash generation before 2022. That’s a significant time to wait, and I don’t know if the current plans will be enough to get that far.
Though the Rolls-Royce share price has been pummelled, behind it I still see a fundamentally good company. At interim time, I said I’d want to see glimmers at the end of the tunnel. And, especially, what shape any refinancing was going to take.
Now I’ve seen it, I still don’t want to buy. I think Rolls-Royce could need to raise even more cash in the next year or two. And, if I bought now, I’d have no way to guess what dilution I’d suffer before things turn upwards.
There might come a time when the Rolls-Royce share price looks like a recovery buy. But it’s not now. Not for me.