News29 Sep 2020 16:47
" Rolls-Royce’s 2.5 billion pound financial repair job should keep it flying for at least 18 months. By then, many of the planes that use its jet engines may be back in the skies. However, a slower recovery could see the venerable British aeroengineer’s dashboard warning lights flashing red again.
With its focus on larger, long-haul engines, virus-related lockdowns have hit the 114-year-old firm particularly hard. In 2019, Rolls was being paid 75 million pounds a week, a quarter of total sales, under maintenance contracts tied directly to flying hours. With entire fleets grounded, that stream has dried to a trickle. This year’s operating loss may top 1.6 billion pounds, according to Refinitiv forecasts.
Chief Executive Warren East’s response looks decisive, cutting 15% of the 52,000-strong workforce and drawing on bank facilities to build an 8.1 billion pound cash pile as of the end of June. He is also turning to shareholders and sovereign wealth funds to raise 2.5 billion pounds, nearly matching the group’s market capitalisation. Yet even this may not be enough to see Rolls safely through the crisis.
Assume, conservatively, that many of Rolls’ customers stay grounded this year and next. That could see 3 billion pounds of cash walk out of the door by the end of 2021, Moody’s reckons. East’s cushion would shrink to 5.1 billion pounds by December 2021, or just 3.1 billion pounds if a credit facility is not renewed. That doesn’t leave much leeway.
The 2.5 billion pound cash injection helps, pumping up East’s cash cushion to 5.6 billion pounds at the end of 2021. Yet even then, Rolls would be vulnerable. In 2022, its liquidity buffer is likely to take another big hit in the first quarter, when parts for new contracts are bought. Debt would be a toppy 3.5 times EBITDA, according to Breakingviews calculations, compared with less than one before the crisis.
Rolls’ fate would then hinge on how quickly air services are restored. The company reckons it could generate 750 million pounds of free cash flow in 2022. It also hopes to sell assets. Yet a slower recovery could lead to more losses that year, Moody’s reckons. East may be forced once again to tap shareholders, or even the UK government. Investors who stay on board should fasten their seat belts. "