Rolls-Royce shares hit their lowest level since 2004 on Monday after the British aero engine maker confirmed it was considering a rights issue of up to 2.5 billion pounds ($3.23 billion) following months of speculation about its finances.
Britain’s best known engineering company, which also makes engines for ships and powers the UK’s nuclear submarines, put out a statement on Saturday in response to media stories.
The COVID-19 pandemic has blown a major hole in its balance sheet as airlines pay the company according to how many hours its engines fly, pushing it to a record loss of 5.4 billion pounds in the first half of 2020.
Its shares have shed 76% of their value this year. They were down 8% at 165 pence at 1121 GMT.
Analysts say that despite the COVID-19 hit, Rolls’ balance sheet is not in need of immediate funding and they had expected the company to wait for signs of recovery before launching any rights issue.
Berenberg said an equity raise would remove balance sheet risk and improve sentiment, although the prospect of share dilution would likely continue to weigh on the shares for now.
The Financial Times reported that Rolls-Royce is in discussions with sovereign wealth funds including Singapore’s to help underpin any fundraising efforts.
But with Britain holding a “golden share”, government consent may be needed, while under rules drawn up when the company was privatised in 1987, foreign ownership of Rolls-Royce is limited to 15 percent.
Rolls said that no decisions have yet been taken about the precise amount to be raised or by what means.
Given the low share price, Agency Partners analyst Nick Cunningham said that raising new equity would be a last resort for the company.
Rolls said at the end of August it wanted to sell its turbine-blade maker ITP Aero and other assets to try to raise at least 2 billion pounds. On Saturday it said it was also looking at equity or debt issuance.
There is also back-up in terms of the company’s importance to the UK’s military capability and its economy in terms of exports and its investment into research and development.
“There’s a very, very large elephant in the room, which is Her Majesty’s Government, which, let’s face it, is not going to let Rolls go,” Cunningham said.
“The ultimate downside, is probably not present.”
($1 = 0.7746 pounds)
Reporting by Sarah Young; editing by Kate Holton, Kirsten Donovan