Are Rolls Royce well equipped to reverse their poor economic performance in 2020?

Rolls Royce, one of the great British manufacturing companies, has felt the effects of the coronavirus pandemic particularly hard. The aerospace engineering company has seen huge drops in its share prices since mid-February as a result of the fall in demand for air travel. To combat the economic downturn faced in the last two quarters, Rolls Royce has looked towards recapitalisation instruments, in the form of rights issues.

However, with leading investors scaling back their underwriting commitments, the success of the rights issue and additional lending packages are furthermore uncertain. Both Goldman Sachs and Morgan Stanley have reduced their exposure by half from the £2bn rights issue package. This was due to concerns over the timing of the issue, which would coincide with the US election, which has ultimately led to increased market volatility.

Rolls Royce was able to make up the shortfall caused by this investment withdrawal by announcing that BNP Paribas, HSBC and Citi would step in as lead underwriters for the debt package. With Goldman and Morgan Stanley taking a step back, what does this indicate for the outcome of the recapitalisation move from the aviation company?

The share price of Rolls Royce has taken a huge blow, attributing to extremely discounted new shares. Before the pandemic, its value stood just below the £7 mark in February but has since declined to the current valuation of 154.70p. With a 32p price per share, the rights issue could draw in heavy investment. This prudent fundraising tool could see both a large increase in the demand and price of Rolls Royce shares and in doing so, build more confidence in the company's financial future.

Company Chief Executive Warren East will be wary of the £3.2bn net debt repayment due date later this year and hopes that the new share issue, alongside potential future bond options, can help take the pressure off Rolls Royce refinancing. Mr East attempted to reassure investors by suggesting the liquidity issues the company has faced will be solved by this upcoming issue of shares. Is the Chief Executive's confidence misplaced and was the recapitalisation delayed too much? Only time will tell, with the turbulent political climate in the US and financial centres worldwide still affected by COVID-19.

With credit agencies such as Moody's and Fitch Ratings downgrading Rolls Royce bonds, it is clear that the aerospace company need to re-establish confidence from investors, traders and customers. The financial measures planned, and major layoffs that will occur in 2021, will help the company cut costs and raise capital, but were these decisions made too late? Only the outcome of the lending packages will indicate whether there will be a change in fortune for Rolls Royce.