Rolls-Royce prices £2bn in senior notes as part of recapitalisation

Rolls-Royce has priced an offering of three tranches of senior unsecured notes denominated in dollars, euros and sterling, it announced on Thursday, to raise £2bn, as part of its recapitalisation package.

The FTSE 100 company said the bond offering comprised $1bn of 5.75% notes due 2027, €750m of 4.625% notes due 2026, and £545m of 5.75% notes due 2027.

It had announced its intention to raise at least £1bn through a bond offering on 1 October, as part of a proposed £5bn recapitalisation package to increase resilience, strengthen the balance sheet and support long-term strategy.#

The board said on Thursday that, given the “strong demand” from investors for the notes, it had decided to increase the size of the offering to approximately £2bn equivalent.

It said the recapitalisation package also included a £2bn fully-underwritten rights issue, and commitments for a new two-year term loan facility of £1bn.

The combination of the proceeds from the notes, the rights issue and the commitments for the new loan facility was expected to provide Rolls-Royce with gross proceeds of around £5bn.

“As previously announced on 1 October, we have also received support in principle from UK Export Finance for an extension of its 80% guarantee to support a potential increase of up to £1bn to our existing £2bn five-year term loan facility,” the board said in its statement.

“However, given the increase in the quantum of notes being issued, we do not currently plan to progress this potential extension to our loan facility, while still having the option to do so at a later time if required.”

The bond offering was expected to close on 21 October, with the proceeds to be escrowed and available to Rolls-Royce on successful completion of the rights issue.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said the fact that there had been such investor interest in the bond offering could be seen as a vote of confidence in the company’s long term strategy.

“That plan focuses on Rolls-Royce’s defence and power systems businesses, as civil aviation struggles to recover, and is unlikely to do so for some time.

“Its gold plated brand will certainly have attracted investors, even though it’s lost the investment grade rating on its debt.”

Rolls-Royce would be left counting the cost of servicing that debt, Streeter pointed out, as the bonds came with much higher coupons than previous issues.

“Issuing the debt is all part of the grand plan to raise billions to help it navigate the worst crisis in its history, brought on by the collapse in air travel.

“The aircraft [engine] manufacturer has been in a bleak position given there is little end in sight for the falling demand for new planes and it’s already shed assets and announced mass job losses.”

At 0856 BST, shares in Rolls-Royce were down 1.69% at 176.95p.