Rolls-Royce debt crisis rings alarm bells in Whitehall

MINISTERS are ‘concerned’ about Rolls-Royce’s precarious financial position, City sources claim.

Investment bankers said they have heard rumours the Government is ‘starting to get worried’ about the jet engine maker. The company – in which the Government has a ‘golden share’ that gives it the right to block a takeover – has been hit hard by the shutdown of the commercial aviation market.

The illustrious firm’s power-bythe-hour model, where it sells engines at a loss but is paid on how much they fly, has left it bleeding cash. Rolls-Royce is particularly exposed to the collapse in long-haul travel because it makes engines for bigger planes, such as Boeing’s 787 Dreamliner and Airbus’s A350.

As a result, Rolls-Royce shares have collapsed by more than 60 per cent since the start of the year and currently flirt with a 12-year low. The company’s debt has also been downgraded to junk status and major long-term shareholders, such as American activist investor Value Act, have been selling their shares in the FTSE 100-listed firm.

Several weeks ago Rolls-Royce admitted it may need to tap shareholders for extra cash, with reports suggesting it is looking for £1.5billion from an equity capital raising.

Rolls-Royce is also looking to raise £1billion by reviving the sale of ITP Aero, its Spanish engineering division that makes turbine blades for engines. However, David Perry, an analyst at JP Morgan, has warned that £1.5billion from an equity capital raising may not be enough to save Rolls-Royce.

In a note to clients he wrote: ‘An £8billion hole will need much more than a £1.5billion rights issue ... we believe Rolls-Royce needs to raise at least £6billion (through equity sales and disposals) to put itself on a sound footing.’

Perry added that the company’s debt pile will be almost £19 billion by the end of 2020. The Government’s golden share in RollsRoyce is linked to the company’s role in building atomic reactors that power Britain’s nuclear warhead submarines. That allows Ministers to veto any takeover of the business.

In a previous note Perry suggested Rolls-Royce needs to issue £6billion of equity and that this might not be possible from institutional investors – and ‘we think there is high chance of Government intervention’.

The Department for Business, Energy and Industrial Strategy declined to comment.