Never put off till tomorrow what you can do today is good advice for procrastinators and those in a pickle. rolls-royce is undoubtedly in a pickle. and it has arguably been putting off an inevitable equity raise for months. but the situation facing the aerospace engineering group, which confirmed on monday that it was evaluating a cash call of up to 2.5bn, is nuanced and not as straightforward as its weakened share price implies.
It was always really a question of when, not if, with rolls equity issue. its shares have fallen steadily from 680p at the start of the year to 160p by monday. the strain on its balance sheet was plain well before augusts half-year results. revenues based on the number of hours its engines fly plummeted when aircraft fleets were grounded, while cash burn and net debt soared. difficulties forecasting the industrys future could be cause for delay, but that didnt stop easyjet, ryanair and iag tapping investors for cash injections before the summer was out.
Rolls pulled out other stops to shore up its liquidity, though, securing access to 4.2bn in new debt between april and august and starting a painful restructuring process to save cash. it is also targeting 2bn in proceeds from asset sales, with spanish parts maker itp aero slated for disposal.
If the base case for recovery it laid out last month comes to pass, rolls says it shouldnt need the extra equity. that is debatable. it will be a slow return to its investment-grade credit rating without one. but if rolls can afford to wait and circumstances do improve, it could avoid an unnecessarily large and dilutive equity issue. analysts talked about a 2bn raise, not 2.5bn, before augusts results.
Rolls base case depends on avoiding a second series of lockdowns and a rebound in earnest from the fourth quarter, however. recent data are not encouraging. the severe but plausible downside scenario rolls presented last month, under which it would need to find more money within the next 18 months, seems ever more likely. if the worst does come to pass, refinancing will become much more difficult with delay.
Doing an equity raise now is a hedge against rolls-royces worst-case scenario becoming its base case. if there is a drastic improvement in coronavirus cases in the coming weeks, rolls can always change course. but given current conditions, it can ill-afford to put off preparing.
Out of any crisis comes opportunity, jonathan ford writes. and so it is with britains creaking rail franchising system. the collapse in passenger numbers down 70 per cent since the lockdown is accelerating the move to a different contractual model, as the latest crisis measures attest.
The government needs to keep the ghostly network running if it is to have much chance of luring more workers back to offices and factories, without gridlocking the countrys roads.
Emergency contracts handed out in march, which essentially underwrote the costs of the network, are evolving. new recovery agreements with operators are more stringent. the government will continue to take the revenue risk until the spring of 2022. but the fees paid to operators, based on pre-coronavirus costs, will be capped at 1.5 per cent rather than a flat 2 per cent beforehand.
Some of that fee will be subject to performance measures. these include obvious ones such as punctuality, cleanliness and so forth. but there also could be rewards for luring customers back on to the railways faster.
Given the rise of zoom, and enduring doubts about the speed of the recovery in commuter traffic, a fee-based system may be the most sensible destination, with operators paid to provide capacity and the network taking some or all of the revenue risk.
Moving to such a system isnt a panacea. but it could at least eliminate some of the gaming that went on under the franchise regime. this not only saw operators treat franchises as an upside-only option, coining it in the good times and handing them back when things got tough. it led franchise agreements to become hugely prescriptive as the department for transport tried to ensure that profits were not made at the expense of service quality. that snuffed out one of the main virtues of franchising: the scope for innovation.
The challenge will be to make a fee-based model both dynamic and efficient. transport for london, which has long operated one, had some of the highest costs on the network of any uk operator, according to a 2014 study by the office of rail and road. the government will need to show it can avoid simply puffing up costs across the entire network. but in the meantime, keeping the trains on the track is probably enough.