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Will It Stop The Rot?

29 July 2020 by lberuti

Like all the other players in it sector, ROLLS ( Rolls Royce Plc ) has been among the many casualties on the COVID-19 crisis. The company has been negatively impacted by the slow recovery in international long-haul travel, which has disproportionately hit it as it mainly powers jets that serve those routes. Cash-flows from hourly maintenance contracts have slowed immediately on reduced flying (the company highlighted at its trading update that wide body engine flying hours fell by roughly 50% and 75% in the first half of 2020 and the second quarter of 2020 respectively), and it will be followed by time and material as engine work will be cancelled or delayed. The slow recovery is putting ROLLS’ financial situation under extreme stress and it has led the company to review a range of options in order to strengthen its balance sheet so that it can weather and see past the current crisis. It therefore came as no surprise when Reuters said the company is planning a share issue to raise as much as BGBP1.5Bln. Although at current levels (453bps) ROLLS’ risk premium is meaningfully off its wides (it traded up to 670bps back in May), it had been trending a bit wider recently. If the right issue materialises, it should be enough to stop the rot momentarily, but some said that such an amount is most likely at the low end of what is needed to calm durably the credit story.