Rolls Royce share price: what you need to know about upcoming rights issue

• Rolls Royce is preparing to raise £2 billion through a rights issue to bolster its balance sheet and access a wider package of financing to give it headroom during the pandemic, which has hit demand as airline travel has collapsed.
• Rolls Royce is burning through cash and doesn’t expect to start generating positive cashflow again until the second half (H2) of 2021, but is trying to stem the cash-bleed by undertaking the biggest restructuring in its history.
• Those with positions on Rolls Royce will be materially impacted by the rights issue and need to take action. We explain how to participate and outline what your options are.

Rolls Royce prepares to launch £2 billion rights issue

Rolls Royce unveiled a plan at the start of October to raise cash from existing investors through a rights issue. This will provide it with extra cash to shore up its balance sheet, which has deteriorated during the coronavirus pandemic, and give it the financial headroom it needs to recover.

Importantly, the rights issue underpins a much wider finance package worth £5 billion in total, comprised of:

• Raising £2 billion in cash through a rights issue
• Raising £1 billion in bonds
• Securing a new £1 billion loan facility (which will replace the unused £1.9 billion facility secured earlier this year that was due to expire in October 2021)
• Securing £1 billion extra headroom on an existing £2 billion loan facility that is 80%-guaranteed by the UK government.

The bonds and extra headroom are all subject to the rights issue being completed, which in turn is still subject to a shareholder vote at a General Meeting pencilled in on 27 October.

Why is Rolls Royce conducting the rights issue and securing liquidity?

Rolls Royce has been severely impacted by the coronavirus pandemic, predominantly because of its exposure to the airline industry. Over half of its underlying revenue comes from the civil aerospace sector, which has collapsed this year thanks to lockdowns and travel restrictions.

Global airline demand was down over 80% year-on-year (YoY) between April and July 2020, according to the International Air Transport Association. This unravelled Rolls Royce’s business model which sees it paid based on the number of hours its engines are actively powering planes in the air. Plus, the slump in demand has prompted airlines to delay or cancel orders for new aircraft, supressing demand for widebody aircraft that Rolls Royce provides engines for.

Demand has also been disrupted for its engines used in boats and power generation plants. The only resilient part of the business has been serving the defence sector, but that only accounts for a fifth of revenue and is not enough to offset the weakness elsewhere.

Rolls Royce reported a 24% fall in underlying revenue in the first six months of 2020 and said it was pushed to a pre-tax loss of £5.4 billion. The company expects annual underlying revenue to be 25% to 30% lower in 2020 than 2019.

The situation means the company has been bleeding cash, having burnt through £2.8 billion in H1 alone. The company expects to burn through slightly less cash in H2 as it prays the airline market can begin to stage a recovery, but it still expects to report a total cash outflow of £4 billion in 2020.

However, the recovery in the airline industry will be slow and gradual. As a result, Rolls Royce only expects to begin generating positive cashflow in H2 of 2021. Still, it says it will post negative cashflow for 2021 as a whole before going on to target £750 million of free cashflow in 2022.

Notably, Rolls Royce has two bonds - one worth $500 million and the other €750 million - plus another £300 million debt all due before the end of 2021.

In light of the situation, Rolls Royce is understandably looking to secure extra liquidity and cash now rather than later. This will also be important for its plans to raise over £2 billion by offloading some non-core elements of the business in the near future, such as its ITP Aero business. The rights issue and extra headroom will put Rolls Royce on better footing during negotiations compared to a business in financial trouble.

Coronavirus pandemic prompts largest restructuring in Rolls Royce history

Rolls Royce announced in May it was undertaking the largest restructuring in its 114 year history to try to reduce costs and prepare itself for significantly lower demand from the airline industry over the longer term.

This primarily involves reducing the number of products it makes for the civil aerospace industry, including reducing the number of sites making widebody engines from three plants to just one in Derby, UK. In total, it is looking to cut 9000 roles from its 52,000-strong workforce.

The latest restructuring should result in Rolls Royce making ‘at least’ £1.3 billion in annual pretax cash savings by the end of 2022, building on the initiatives introduced earlier this year that has already reduced costs by £350 million in H1.

What does the rights issue mean for Rolls Royce shareholders?

The rights issue will see Rolls Royce allow existing investors to subscribe to 10 new shares in the business for every three shares they currently own. To provide an example, if you owned 1000 Rolls Royce shares at the time of the rights issue then you would be entitled to purchase 3333 new shares.

The new shares will be issued at a price of 32p, which is a 41.4% discount to the theoretical ex-rights price (TERP) per share of 54.6p on the day before the rights issue was announced.

The rights issue is significant for investors. Taking up your rights will allow you to retain your stake by buying more shares at a discounted rate. Those that don’t take up their rights will be heavily diluted.

The recapitalisation will result in 6.43 billion new shares being issued, assuming all rights are taken up, which would result in Rolls Royce’s share capital increasing 333% from 1.93 billion to 8.36 billion shares in issue. Any shareholder that doesn’t take up their rights will be diluted by almost 77%.

Read more: What happens to my shares position if the company offers a rights issue?

How do I take part in the rights issue?

Investors need to take action if they wish to participate in the rights issue. If you hold a Rolls Royce position on the close of business on 27 October then we will book the new rights on your account on the Ex-Dividend Date on 28 October.

You will receive an email on Ex-Date clarifying your options so please wait and reply, stating your election option. Alternatively, you can email corporate.actions@ig.com with your account number/ID stating your intent to take up the offer. Either way, please do not email or call before the Ex-Date as the election will not be registered.

If you hold rights on multiple accounts then you need to clearly state the relevant account IDs to take the rights up on and we will take it from there.

We will email you a confirmation that we have received your election, but as we will expect high volumes, please bear with us as it may take up to 48 hours. As long as we have received your email with your election preferences ahead of the IG deadline date (to be confirmed [TBC]) and your account is funded on that date, then your election will be processed.

The only thing left to do once you have sent that email is make sure your account is funded accordingly to cover your new position by the IG deadline date (TBC).

Please note there will be no option to take up more shares than your allocation allows.

Do I need to deposit funds if I hold my shares in a share dealing or ISA account?

Yes, you will need to ensure the relevant account where you are holding the rights is adequately funded in order to participate. The Corporate Actions department will not take an instruction to transfer cash between accounts and this will be your responsibility.

When does my share dealing or ISA account need to be funded by?

You will need to make sure the total available cash amount to take up the offer is available on your relevant account before the IG deadline date, and the balance maintained until the new shares have been booked on your account after pay date. The IG deadline date is not yet available but will be emailed to all clients when we are informed by our brokers. This can be up to 5 days after the Ex-Date, which is on 28 October.

How do I know how much cash I need to fund my ISA or Share dealing account by the IG deadline date?

Use this simple equation - – rights on your account * subscription price = funds needed by the IG deadline date.

For example, 1000 rights * 32p = £320

What if I don’t want to take up all my rights, can I make a partial election?

Yes, you will need to state clearly on the email you send to corporate.actions@ig.com the number of shares you would like to take up. If you hold your rights in a CFD, share dealing or ISA account, then please state the total number of shares you would like to take up, and if you are spread better then state the Per Pt amount. Please do not use monetary value, such as £500 worth of shares.

What happens if my ISA is at the maximum allowance?

You will need to email corporate.actions@ig.com with the account number/ID for both your ISA and share dealing accounts stating you wish to take up the offer and that you would like the new shares transferred to the share dealing account.

So long as your share dealing account is properly funded before the deadline date, we will take care of the rest.

Can I choose to sell my rights and when can I trade them?

Yes, you can sell your rights. You will need log into the platform and trade out of the position accordingly.

You will be able to trade the rights between the Ex-Date on 28 October to the IG deadline date, which is still to be confirmed.

What happens if I hold a long position, not elected to take up my rights and do nothing?

If you fail to take any action then your rights will lapse. We expect there to be lapsed rights proceeds for this offer but we cannot guarantee this. Any proceeds from lapsed rights are usually known 10 working days after the IG deadline date and paid after pay date.

What if I have a short position, what happens to my position and what are my options?

As you are short you will have two options. The first is to trade out of the rights before the IG deadline date to close the position. The second is to do nothing and risk your position being taken up automatically depending on the result of the offer.

Doing nothing could mean having the rights removed around the pay date and potentially having a new short position in Rolls Royce booked at the subscription price.

When is the pay date?

The pay date is 12 November 2020 (This is not the date to fund the account, that would be the IG deadline date).

It is estimated IG should receive the new shares one to two days after the pay date from our broker and this is when the rights are removed and the new shares are booked on clients’ accounts that elected to take up their rights.

I have a guaranteed stop position, what happens to my position?

If you hold a Rolls Royce position with a guaranteed stop on the close of business the day before Ex-Date, this means the morning of Ex-Date pre-market we will amend your position to automatically take up the rights on your behalf. The stop, level and size will be amended to keep the monetary risk the same as pre event.

What will happen if I had a working order in Rolls Royce?

All working orders in Rolls Royce will be deleted pre market on Ex-Date.