Rolls-Royce is pushing through its refinancing plans © Bloomberg

It is a dark hour for Rolls-Royce, aero-engine maker. The pandemic is in a second wave. Wide-body, long-haul aircraft remain grounded. The credit rating of the company, so-often dubbed a British engineering champion, is two notches below investment grade. That’s not quite junk squared. 

Yet Rolls-Royce is pushing through its refinancing plans, despite market misgivings. This month, lead advisers to the group’s well-trailed £2bn and heavily-discounted rights issue baulked and cut back their underwriting exposure.

On Thursday the engine-maker announced it was issuing £2bn of six- and seven-year bonds, paying coupons of up to 5.75 per cent. That was the price extracted by income-hungry investors to get the deal off the ground. Two years ago, Rolls issued a 10-year bond with a coupon of 1.625 per cent. The European benchmark for high yield debt is 3.7 per cent. Some investors think it should have idled on the tarmac until the skies cleared. 

However Rolls-Royce is a long-distance business that must map a route based on forecasts stretching far into the future. If it doesn’t take off now it will miss its landing slot. That may end in a direct bailout by the state. 

Put plainly, the group needs cash now. It has run through its savings and will have racked up close to £3.5bn in net debt by the end of this year, most of which fall due now or in 2021.

Nor will the cash outflows reverse any time soon. Analysts expect a further outflow of £1bn or so in 2021. Issuing shares and bonds, combined with a new two-year facility, puts £5bn in the engineer’s boiler suit pockets and gives it a year or so to restructure, downsize and flog off £2bn of its assets, for instance Spanish parts maker ITP Aero, that are now not wanted on voyage.

After that Rolls-Royce can look at repairing the balance sheet and work on improving its credit rating. An investment grade rating is not about prettification. It dictates the terms on multiyear contracts that the group hopes to strike as soon as economies are back on track, planes are in the air and government defence departments are back making deals again. According to its “reasonable worst-case scenario”, long-haul flights should be back to 80 per cent of pre-Covid heights by 2022.

If it delays raising funds now, it will cost Rolls-Royce later. A 5.75 per cent coupon may be a price worth paying to underpin the cash flows of the future.

Railing against pub regulators

Since schoolboys drank beer for breakfast, regulators and politicians have railed against the beer tie, Cat Rutter Pooley writes. It seems extraordinary then that Heineken’s UK pub operation should tweak the watchdog’s tail by seemingly strong-arming publicans into taking its kegs when they want to break free. 

The beer tie forced tenants to pay over the odds for pints in exchange for cheaper rents. The equation wasn’t always transparent or balanced. Now the rules insist tenants can pay market rents for both if they want to. 

Pubs Code Adjudicator Fiona Dickie says Heineken-owned Star Pubs & Bars broke those rules for almost three years “seriously and repeatedly”. The landlord pressured tenants to buy “unreasonable levels of Heineken beers and ciders” when they asked to break the tie, she says. For that, Ms Dickie fined Star £2m on Thursday. It was the PCA’s first.

Star was allowed to make tenants buy Heineken’s beers. But it was meant to consider how much it was reasonable to make them buy on a pub-by-pub basis. Stopping freed tenants from shopping around for other brands went against more than the spirit of the rules introduced in 2016. 

Star should have considered the wisdom of testing a regulator whose back was already against the wall. Ding-dongs between regulators and pub landlords have a long history. A pending review into the PCA’s performance is unlikely to be flattering. Under Ms Dickie’s predecessor, whose term ended earlier this year, it built up a backlog of arbitrations, was criticised for close ties to the big pub companies and went three years without launching an investigation. The one into Star was the PCA’s first. 

Star isn’t backing down. It disputes the watchdog’s findings and is considering an appeal. The PCA didn’t give good enough guidance on the rules, Star says. But where the watchdog did give guidance, Star’s approach to following it seems to have been lackadaisical. 

Star says it is a “responsible business that takes its regulatory obligations extremely seriously”. That sits uncomfortably when Star’s compliance officer was required to make sure the law was “interpreted to the commercial benefit of Heineken UK”, rather than just checking it complied with the law. 

Regulatory inaction encourages a culture of indifference, if nothing else. It’s not good enough for regulators to just rail, they need to show some muscle. Ms Dickie has only been in the job since May. The fight with Star is a good test of its strength.


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