Rolls-Royce debt crisis rings alarm bells in Whitehall

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City sources claim Ministers are ‘concerned’ about Rolls-Royce’s precarious financial position

Ministers are ‘concerned’ about Rolls-Royce’s precarious financial position, City sources claim.

Investment bankers said they have heard rumours the Government is ‘starting to get worried’ about the jet engine maker. The company – in which the Government has a ‘golden share’ that gives it the right to block a takeover – has been hit hard by the shutdown of the commercial aviation market. 

The illustrious firm’s power-by-the-hour model, where it sells engines at a loss but is paid on how much they fly, has left it bleeding cash. Rolls-Royce is particularly exposed to the collapse in long-haul travel because it makes engines for bigger planes, such as Boeing’s 787 Dreamliner and Airbus’s A350. 

Concerns: Investment bankers said they have heard rumours the Government is ‘starting to get worried’ about the jet engine maker

As a result, Rolls-Royce shares have collapsed by more than 60 per cent since the start of the year and currently flirt with a 12-year low. The company’s debt has also been downgraded to junk status and major long-term shareholders, such as American activist investor Value Act, have been selling their shares in the FTSE 100-listed firm. 

Several weeks ago Rolls-Royce admitted it may need to tap shareholders for extra cash, with reports suggesting it is looking for £1.5billion from an equity capital raising. 

Rolls-Royce is also looking to raise £1billion by reviving the sale of ITP Aero, its Spanish engineering division that makes turbine blades for engines. However, David Perry, an analyst at JP Morgan, has warned that £1.5billion from an equity capital raising may not be enough to save Rolls-Royce.

In a note to clients he wrote: ‘An £8billion hole will need much more than a £1.5billion rights issue … we believe Rolls-Royce needs to raise at least £6billion (through equity sales and disposals) to put itself on a sound footing.’ 

Perry added that the company’s debt pile will be almost £19billion by the end of 2020. The Government’s golden share in Rolls-Royce is linked to the company’s role in building atomic reactors that power Britain’s nuclear warhead submarines. That allows Ministers to veto any takeover of the business. 

In a previous note Perry suggested Rolls-Royce needs to issue £6billion of equity and that this might not be possible from institutional investors – and ‘we think there is high chance of Government intervention’. 

The Department for Business, Energy and Industrial Strategy declined to comment.

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