Rolls-Royce Holdings - Proposed Recapitalisation
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ROLLS-ROYCE HOLDINGS PLC
PROPOSED RECAPITALISATION PACKAGE TO INCREASE RESILIENCE, STRENGTHEN BALANCE SHEET AND SUPPORT LONG-TERM STRATEGY
RIGHTS ISSUE TO RAISE APPROXIMATELY £2 BILLION AND INTENTION TO COMMENCE A BOND OFFERING TO RAISE AT LEAST £1 BILLION
COMMITMENTS AGREED FOR NEW £1 BILLION TWO YEAR TERM LOAN FACILITY; SUPPORT IN PRINCIPLE FROM UK EXPORT FINANCE FOR EXTENSION OF EXISTING 80% GUARANTEE TO BACK POTENTIAL LOAN INCREASE OF UP TO £1 BILLION
Rolls-Royce Holdings plc ("Rolls-Royce" or the "Group" or the "Company") today announces its intention to raise gross proceeds of approximately £2bn by way of a fully underwritten 10 for 3 Rights Issue. In conjunction with the Rights Issue, the Company intends to commence, in the near future, a Bond Offering to raise gross proceeds of at least £1bn. The Company has also agreed commitments for a new two year term loan facility of £1bn and received an indication of support in principle from UK Export Finance for 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.
· Proposed fully underwritten 10 for 3 Rights Issue of up to 6,436,651,043 New Ordinary Shares at 32 pence per New Ordinary Share to raise gross proceeds of approximately £2bn.
· Rights Issue Price represents a 41.4% discount to the theoretical ex-rights price per Existing Ordinary Share by reference to the Closing Price of 130 pence per Existing Ordinary Share on 30 September 2020.
· The Rights Issue is subject to approval by Shareholders at a General Meeting expected to be held on 27 October 2020.
· Intention to commence Bond Offering to raise gross proceeds of at least £1bn, denominated in US dollars, euros and/or pounds sterling, currently expected to be completed by settlement of the Rights Issue subject to market conditions.
· Commitments agreed for a new two year term loan facility of £1bn, conditional upon the Rights Issue completing, the cancellation of the £1.9bn Liquidity Facility and execution of a facility agreement.
· In addition, UK Export Finance has indicated that it would, in principle, support an extension of its 80% guarantee of our existing £2bn five year term loan to support a loan amount increase of up to £1bn. This is subject to completion of the Rights Issue, agreement of terms with lenders and approval of those terms by UK Export Finance and HM Treasury, and there is therefore no guarantee that this increase will take place.
· Having considered a number of different scenarios, and in particular a "reasonable worst case" scenario, we have determined that it is in the best interests of Shareholders to pursue the Rights Issue and Bond Offering now in order to:
· Improve our liquidity headroom
· Reduce our level of balance sheet leverage
· Support disciplined execution and investment to ensure we maximise value from our existing capabilities and pursue disposals in a manner that delivers value, as we position the Group to benefit from new technologies focused on sustainable power.
· These steps will provide the Group with improved financial resilience and a more appropriate balance sheet structure in order to weather macro-economic risks before we return to strong cash generation, expected in 2022.
· Longer-term prospects remain strong. In Civil Aerospace, we do not expect a similar level of investment as we move forward, given the majority of the development of our current programmes is complete. We expect our relatively young installed base of engines will provide strong, annuity-style cash flows over the long term, reflecting the long in-service lives of our products and our services-oriented business model. We see good growth opportunities in both Defence and Power Systems. Over the longer-term, our capabilities leave us well positioned to capitalise on the transition to sustainable, low-carbon power.
Warren East, Chief Executive, said "The sudden and material 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. 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. By raising additional capital now, we will improve our liquidity headroom and reduce our level of balance sheet leverage, while supporting disciplined execution and investment to ensure we maximise value from our existing capabilities. The strength of our people, brand and global footprint, together with our innovation and technology will support us as we emerge from the COVID-19 pandemic and implement our longer-term strategy, playing a crucial role in the world's transition towards a net-zero carbon economy."
Background to the proposed recapitalisation
We delivered strong progress in 2019 and started 2020 with real momentum. The sudden and material effect of the COVID-19 pandemic, however, 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, in our Power Systems business.
In our initial response to the COVID-19 outbreak, we rapidly implemented a number of proactive safety measures, in line with local and national guidelines, designed to ensure the safety and wellbeing of our people. We also implemented a set of measures to conserve cash from March 2020, which generated total pre-tax cash savings of approximately £350m in the first half of 2020 and are expected to generate approximately £1bn in pre-tax cash savings in the full year ending 31 December 2020. Alongside this we took early actions to bolster our liquidity position, securing £4.2bn of additional funding.
On 20 May 2020, we also announced a major restructuring of the Group to adjust to the new level of anticipated demand from customers in Civil Aerospace as a result of the impact of the COVID-19 pandemic. This restructuring, the largest in the Group's history, is intended to deliver a total annual pre-tax cash saving of at least £1.3bn by the end of 2022. We expect the restructuring programme to result in a proposed reduction in headcount of at least 9,000 roles. We have continued to make further good progress on this plan, with approximately 4,800 people having left the business by the end of August, with at least 5,000 expected by the year-end.
We believe this restructuring programme, alongside an anticipated recovery in our end markets, will help us restore financial performance. Our intent remains to return the Group to positive cash flow during the second half of 2021. We are targeting reaching at least £750 million FCF (excluding disposals) as early as 2022 and we believe the longer-term prospects remain strong, with further growth in cash flow and returns expected thereafter.
The pathway to strong cash flow, however, remains dependent on the timing and shape of recovery from COVID-19, notably with regards to long-haul air travel. There is significant uncertainty about the precise pace of this recovery and the possibility of delays remains a risk. The Board considers it prudent to prioritise resilience and flexibility, and is therefore pursuing the Rights Issue and Bond Offering.
There has been no material change in our outlook for the Group since the 2020 Half Year Results Announcement published on 27 August 2020. As expected, revenue and underlying operating profit for the first eight months of the year were materially below the prior year, significantly affected by the COVID-19 pandemic and related one-off charges taken in the first half of 2020. Consistent with the trends in the first half, our Civil Aerospace and ITP Aero businesses continued to see the largest impact from COVID-19; performance in our Defence business remained resilient; and our Power Systems business experienced disruption in some end markets.
The Group continued to experience free cash outflows in July and August, albeit at a reduced level compared to the first half of 2020 and modestly better than our expectations. This reflected the ongoing management actions to control costs, large engine flying hours slightly ahead of our "base case" forecast and some cash flow timing benefits. We continue to expect a free cash outflow of approximately £4bn in the full year ending 31 December 2020, although uncertainties remain around the timing and shape of the recovery in large engine flying hours and the timing of large engine deliveries.
A prospectus in relation to the Rights Issue (the "Prospectus") is expected to be published at www.rolls-royce.com/investors later today. The preceding summary should be read in conjunction with the full text of the following announcement, together with the Prospectus. Unless the context otherwise requires, words and expressions defined in the Prospectus shall have the same meanings in this announcement.