Rolls-Royce rescue plan steams ahead as shareholders back £2 billion rights issue

Shareholders in Britain’s Rolls-Royce RR.L approved the aero-engine maker’s 2 billion pound ($2.61 billion) rights issue on Tuesday that will bolster the company’s finances after the pandemic stopped planes flying.

The approval of the capital raise boosts the group’s total liquidity by 5 billion pounds by unlocking extra debt options, including 2 billion pounds from a bond issued earlier this month and an extra 1 billion pounds from a two-year bank loan.

Airlines pay Rolls based on how many hours its engines fly and a plunge in flying during the crisis has put Rolls’ finances under intense scrutiny.

But on announcing the rights issue plan at the start of October, CEO Warren East said securing the new shareholder funds and extra debt would take “any liquidity questions off the table through this crisis”.

A statement published on Tuesday showed that 99.5% of shareholders approved the rights issue plan, confirming comments from the chairman earlier that the result was passed overwhelmingly.

Shares in Rolls-Royce traded down 1% at 223 pence by 1308 GMT, reversing the 2% rise immediately after the meeting. The stock is up 75% since Sept.30, the day before the capital raise was announced. Overall, it has lost two-thirds of its value this year.

Under the terms of the rights issue, investors can buy 10 new shares for every three they own at 32 pence each, a 41% discount to the theoretical ex-rights price.

East told the meeting on Tuesday that the company had been right to go ahead with the equity raise, instead of waiting.

“We didn’t want to put the business and our shareholders’ interests at risk by gambling on what the situation might look like in the middle of next year,” East said.

Investors are backing East’s plan to help the company ride out COVID-19 through cost cuts of 1.3 billion pounds, including axing 9,000 jobs and closing factories to adjust to lower demand from airline customers that fly with Rolls engines on Boeing 787s and Airbus 350s.

Rolls also plans temporary shut-downs at factories and to reduce working hours and benefits as part of the those cost-cutting plans, the Financial Times reported.

The company’s chairman Ian Davis said that Rolls’ successful bond issue last week, when it raised double its 1 billion pound target following strong demand, meant it would not for now need to use an extension of a British government-backed guarantee on another loan.

Demand for the bond issue showed “the effectiveness of this equity raise in reassuring debt markets,” Davis said.