The aero-engines that Rolls-Royce majors on these days are a lot louder than the purring cars it used to make. But they still don’t match the shouty chutzpah of a Barclays bank trading floor.
On the face of it, it is hard to think of two more dissimilar British businesses than Rolls-Royce and Barclays.
And yet, amid the economic crisis caused by Covid-19 lockdowns, the Derby-based manufacturer finds itself in a very similar situation to that of the Canary Wharf banking giant when the 2008 crisis hit.
Both companies are of systemic importance to Britain, a key defence contractor arguably even more so than a top four bank. Both are big employers, with tens of thousands of staff. And just like Barclays in 2008, Rolls-Royce today is in dire need of fresh capital.
It is not alone. As the financial pressures of the pandemic bite, businesses across the world — especially those exposed to the shutdowns and disruption across travel and leisure — are raising capital at a rate not seen since the last crisis. In the second quarter of the year, according to data group Dealogic, nearly $225bn was raised globally through the issuance of new shares by listed companies, topped only by the $230bn accumulated in the fourth quarter of 2009.
Twelve years ago, as the financial crisis hit, Barclays was quick to realise how short of equity it was. It knew some shareholders were reluctant to pour money into a bank whose share price, by the summer of 2008, had halved in six months.
Government bailout money was available. But fearing state meddling in pay and strategy decisions, the bank was desperate to fend off a fate that would soon befall rivals from Royal Bank of Scotland to Lloyds.
After frantic negotiations with sovereign wealth funds and rich royals in the Middle East and Asia, Barclays raised a combined £11.8bn from the likes of Qatar Holding, Abu Dhabi’s Sheikh Mansour and Singapore’s Temasek between June and October 2008.
Rolls-Royce’s current situation is not quite so pressing. It has no financial regulators urging it to act, and the company says it has access to liquid funds of £8.1bn, enough to fund it for more than a year.
But its outlook is more uncertain even than that of the banks in 2008. Group revenues — more than half of which last year were generated by the civil aero-engine business — have collapsed. Rolls-Royce makes most of its money from the number of hours its engines fly. But airlines have slashed flights and the large aircraft powered by Rolls-Royce’s big engines are likely to be the last to return to the air.
Advisers have been busy preparing the ground for a £2.5bn capital raising. A straightforward rights issue is a possibility but demand from existing investors is far from certain, given growing nervousness about the outlook for British businesses as they confront both the pandemic and Brexit.
The result for many is bigger price discounts on rights offerings, now typically 30 per cent, and potentially stiffer underwriting terms, as investment banks worry about being left with a rump of unwanted shares. The echo of another bank capital raising from 2008, when a flunked HBOS issue left underwriters with a majority of the stock, is ringing in their ears.
Rolls-Royce may yet conclude, as Barclays did in 2008, that it must shore itself up through private means. As the Financial Times reported this month, the group is in talks with sovereign wealth funds including Singapore’s GIC.
If this kind of deal did proceed it could — theoretically at least — be strategically as well as financially valuable.
Barclays can hardly claim such a legacy despite a stated ambition of using its 2008 investors to help expand business across the Middle East. For years legal controversy surrounded the so-called “advisory service agreement” under which the bank paid vast fees to its Qatari investors, supposedly in exchange for aiding that expansion. Only recently did several former senior executives see off legal charges alleging these were a “smokescreen” for illegal payments. But the deal did not succeed strategically. The investors have disappeared from the shareholder register. And as of last year the bank was making just £59m of revenue from the whole of its Middle East and Africa operations, equivalent to 0.2 per cent of group income.
Rolls-Royce does at least have a credible strategic rationale for wanting to cement its position in Singapore. It has built up a substantial operation in the country, and last year generated revenue there of £702m, 4 per cent of group income. A capital injection from the likes of GIC could be an effective underpin for further expansion in the region when the skies begin to clear.
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