Rolls-Royce kicks off marketing for highly-anticipated junk bond


By Eleanor Duncan

LONDON, Oct 5 (IFR)Rolls-Royce is kicking off the high-yield bond leg of its survival plan this week with a £1bn-equivalent multi-currency deal.

The British aerospace company (Ba3/BB-/BB+) has hired BNP Paribas, Citigroup and Goldman Sachs as global co-ordinators and bookrunners to kick off four days of investor calls in Europe and the US, beginning on October 6.

Rolls-Royce is looking to place a minimum of £1bn-equivalent senior unsecured notes targeting maturities of 2026 (long five-year) and 2027 (straight seven-year) and denominated in euros, sterling and/or US dollars.

Proceeds, together with the company’s rights issue, will be used for increasing the company’s liquidity headroom, and to repay upcoming debt maturities including the US$500m 2.375% notes due October 2020, the €750m 2.125% notes due June 2021 and£300m of commercial paper due March 2021.

BNP Paribas and Goldman Sachs will be co-ordinating European logistics, while Citigroup will be co-ordinating US logistics.

The high-yield bond forms part of Rolls-Royce’s survival plan, announced on Thursday, which also includes a £2bn rights issue and up to £2bn of additional liquidity, including government backing through UK Export Finance.

Investors have been waiting for the capital raise since July, when the company confirmed the rights issue. The complexity of bringing together equity, bond, loan and UKEF components partly explains the time it has taken for the deal to be put together.

The delay has been painful, with four statements on the forthcoming transaction issued before Thursday, each time encouraging short-sellers to build positions and contributing to a halving of Derby-based Rolls-Royce’s market capitalisation to £2.5bn.

“The most interesting part of this raise is the back-and-forth around the equity component,” said a banker away from the deal. “The company pre-flagged and flagged doing a massively diluting rights issue, and it gave people free-ride to short it.”

While that has meant running the numbers over and over to reflect the falling valuation, a banker involved said the timing is better now than in the summer, when there was misplaced optimism that the coronavirus was fading.

With long-haul travel remaining unpopular, Rolls-Royce is in a tricky spot as the company sells engines below cost and is reliant on servicing contracts that are dependent upon miles flown, noted one investor. Flying hours were down 70%–75% in May, June and July.

“It’s another name in the market that has some serious problems and it’s a question of whether or not they can buy enough time to sort themselves out,” said the investor, who compared the company to cruise operator Carnival.

“If recent history has anything to go by, the market will probably support it but the key assumption right now is the length of time between getting the additional liquidity and the time where their business returns to normality,” said the investor.

(Reporting by Eleanor Duncan, additional reporting Owen Wild, editing by Helene Durand, Sudip Roy)

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