Rolls-Royce is in talks with sovereign wealth funds, including the GIC in Singapore, on a plan to raise around £ 2.5 billion from investors over the next month, according to three people with direct knowledge.
The British aero engine group is working with bankers at Goldman Sachs on the proposed capital increase as it is said to be the youngest company to tap stock market investors to repair a balance sheet badly damaged by the pandemic.
The group intends to start the capital increase in the first few weeks of October, two of those people said. As part of the talks, Rolls-Royce and its bankers are holding talks with several sovereign wealth funds, including GIC, the island nation’s sovereign wealth fund, where the company does significant business.
However, discussions about the capital increase continue, and one person warned that the board was determined to move the decision forward to the last minute.
On Friday, Rolls-Royce shares fell to a 16-year low of 180p, a market value of £ 3.45 billion. Net debt is £ 4.4 billion.
Rolls-Royce and GIC declined to comment.
In response to speculation last week that a capital increase was imminent, Rolls-Royce said it was considering a number of funding options, which could be in the form of debt and equity, but that no final decision had been made.
It also tried to reassure investors about its liquidity, which stood at £ 8.1 billion.
The UK group added that this year it cut costs by £ 1bn and started reorganizing its civil aerospace business for further savings.
Finally, the company announced that it had planned potential divestments, including Spanish aircraft engine maker ITP Aero, to raise an additional £ 2 billion.
Rolls-Royce is currently in discussions with private equity groups about a deal through ITP. It is expected that some non-core companies will be involved in ITP to increase scalability and attractiveness to bidders. The group is also trying to sell its diesel engine business in Bergen, Norway, but is struggling to find buyers.
After negotiating a £ 2 billion loan backed by UK Export Finance in July, the company announced to investors that it has enough facilities to raise it by 2021.
However, Rolls-Royce is facing a heavy burden on its balance sheet due to the cash outflow from the crisis and the need to raise new credit facilities to ensure liquidity. It has a revolving credit facility of £ 1.9 billion that has not yet been drawn but will have to be repaid next October if that is the case.
The company lost its investment grade rating Earlier this year, which could affect its ability to win new business and long-term maintenance contracts when the market finally begins to recover.
Even so, people close to the situation said some investors pushed the company to add debt instead of soliciting shareholders through a rights issue. Some investors had hoped the group could withhold a cash call until it could show some results from its restructuring.
But with many in the industry recently suggesting that the hoped-for recovery could be further away than expected, Rolls-Royce can’t delay any longer, said a person close to the issue.
The company is already on a longer path to recovery than other engine manufacturers, with an emphasis on engines for larger double-aisle jets. The long haul market segment is expected to recover much later than short haul and regional travel.