LONDON (Reuters Breakingviews) - In its darkest hour, Britain turned to Rolls-Royce for salvation. As a developer of the Merlin engine that powered the legendary Spitfire, the 114-year-old firm can claim more credit than most for the Battle of Britain air victory that prevented a Nazi invasion. Eighty years later, in arguably Rolls’ darkest hour, Prime Minister Boris Johnson is returning the favour.
The comparison is apt, and not just because Johnson likes to model himself on wartime leader Winston Churchill. Rolls-Royce engines and technology keep Britain’s nuclear submarine fleet afloat, making it still central to national security. And as the world’s second-largest maker of jet engines, behind General Electric, it is also arguably “too big to fail” at a global level.
Most importantly, the 5 billion refinancing unveiled by Chief Executive Warren East on Thursday puts paid to the question of failure due to the mass grounding of airline fleets by Covid-19. With 2 billion pounds of new equity and up to 3 billion pounds in additional loans and guarantees, East has more than enough in the tank to get through the worst-case coronavirus scenarios. Even if 1 billion pounds of operating cash is incinerated next year – possible, but unlikely - East would enter 2022 with a 7 billion pound-plus financing cushion. Vectoring in disposals, it could top 9 billion pounds.
Underpinning the entire package is the 1 billion pounds lifeline thrown by Johnson in the form of a government guarantee. Without that signal of ultimate state backing, plus the additional equity, Rolls’ bankers would have doubtless been reluctant to keep the taps open. If all the new loans are drawn, Rolls’ net debt would still rise above a worryingly high 4 times next year’s forecast EBITDA, although that would drop to close to 3 times if East’s planned disposals materialise.
Crucially, in return for taxpayer aid, shareholders are contributing a large amount of flesh. Although slightly smaller than an anticipated 2.5 billion pounds, the rights issue is almost the same size as Rolls’ market value after Thursday’s 10% share price decline. That makes staying on board painfully expensive. But at least investors can have the confidence that Rolls should be around to fight another day.
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