Rolls-Royce shares set to slump amid funding crisis

• Rolls-Royce shares set to fall amid funding crisis
• Engine maker forced to raise £2.5 billion via a steep discount to current share price
• Rolls-Royce future uncertain as aviation industry in turmoil amid Covid-19

Rolls-Royce is set to see its share price slump as it looks to raise £2.5 billion in additional funds at a steep discount in a desperate attempt to strengthen its balance sheet amid the economic fallout from the coronavirus pandemic, according to reports.

In fact, City insiders believe the British engine maker could price its cash call at just £1 per share, representing a 33% discount based on its closing price.

It is not yet clear exactly how the company plans to raise the additional funds it so desperately needs, but its management has said that it is looking at a ‘variety of structures including a rights issue and potentially other forms of equity issuance'.

‘We continue to review all funding options to enhance balance sheet resilience and strength,’ a spokesperson for the company said.

'No final decisions have been taken as to whether or when to proceed with any such options, the precise amount that may be raised, or any allotment of shares to any investor including any sovereign wealth fund.'

Rolls-Royce shares closed 3.5% lower on Monday to 149p per share, with the stock down 78% year-to-date.

JP Morgan downgrades price target for Rolls-Royce stock

Adding to the company’s woes, analysts from JP Morgan opted downgrade its rating for the stock to 'underweight' and lower their price target for the stock from 80p to 65p, implying a potential downside of -56%.

The US-based investment bank also said that Rolls-Royce requires at least £6 billion worth of new equity in order to survive the economic impact of the coronavirus pandemic.

‘We believe [Rolls-Royce] needs new equity of at least £6bn, so we would expect more than one equity raise in the next 12-15 months,’ JP Morgan analyst David Perry said in a note.

Covid-19 will push Rolls-Royce to the brink

Perry also warned investors in his note that Rolls-Royce will see total cash outflows of about £6.3 billion in 2020 and 2021, with net debt expected to hit around £20 billion next year.

His prediction is likely based on the coronavirus pandemic remaining a fixture until early 2022, with the World Health Organisation (WHO) admitting earlier this month that a viable vaccine won’t arrive until then.

‘The way that people are picturing it is that in January you have vaccines for the whole world and things will start going back to normal – it is not how it works,’ WHO chief scientist Soumya Swaminathan said. ‘Our best assessment is the middle of 2021 because at the beginning of 2021 is when you will start seeing the results of some of these trials.’

‘All the trials that are ongoing have follow-up for at least 12 months if not longer,’ she added. ‘That is the time you normally like to see to make sure you don’t have a long-term adverse effect after the first few weeks.’

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