Your debt is rated at junk, your cash-flows are erratic, your industry is in turmoil and your share price has tanked. So what horrible rate of interest do you have to pay to raise another billion or two of fresh borrowing? The answer in the case of Rolls-Royce is: not as horrible as feared.
The aero engine maker’s bond offering – the most vulnerable element within the £5bn financing package unveiled a fortnight ago – is likely to be priced at 5%-5.25% for the euro-denominated slice and at 6.25% for the sterling and dollar components, Bloomberg reported on Tuesday.
By Rolls’ pre-pandemic standards, when it could borrow at a shade under 2.5%, that’s expensive. But even 6.25% is not nose-bleed levels for a junk borrower. What’s more, demand for the bonds has been strong. Rolls will increase the size of the bond issue from £1bn to £2bn.
This news should remove any lingering fear that the interlinked £5bn package could fall apart before completion. The next step is shareholders’ approval for the £2bn rights issue later this month, which now looks a formality. The share price has had a wild ride in the past fortnight – it’s been as low as 123p and as high as 223p – but the air of crisis around Rolls finally seems to be fading.
It would be a mistake, though, for other over-stretched pandemic-afflicted companies in need of fresh supplies of debt (and there are many out there) to view Rolls’ experience as a reason to relax.
It’s already obvious that the engine maker, after fiddling for weeks, pressed the fund-raising button just in time. Given the current Covid newsflow, waiting another six months would have been a dangerous course.
Nor can 99% of other borrowers call on the government for support. The UK Export Finance agency is guaranteeing another £1bn of Rolls’ debt as part of the package, taking the tally to £3bn and sending a signal that the state stands in the wings. That helped to get the other financing elements into place.
The moral for other borrowers is this: if you think you may need fresh funds next spring, don’t wait that long. Trying to muddle through a winter of lockdowns and quarantine restrictions looks an increasingly bad strategy.
Wall Street uncertainty
Cheerful news, of a sort, from the US: JP Morgan and Citigroup, two decent financial barometers, see no current need to pile up huge fresh provisions for loan defaults.
Back in April, when JP Morgan took its first stab at estimating the cost of a severe recession, the bank made a loan loss provision of £10.5bn. In Tuesday’s third-quarter numbers, it added a mere $611m to the collection.
So has the US economy stabilised? Chief executive Jamie Dimon’s answer was careful in the extreme. “If the better outcomes happen, we are over-reserved by $10bn. If a double-dip happens, we could be under-reserved by $20bn.”
He’s lobbying subtly for a big stimulus package, of course. Even so, that range of possibilities for a single bank, even a big one, is enormous. Wall Street’s mildly positive noises come with a huge serving of uncertainty.
Mining investors need a Sirius read
Good luck to Cornish Lithium, the startup that hopes to mine a “globally significant” grade of lithium it says it’s found in underground hot springs just north of Redruth.
The big hope is that there’s enough lithium in Cornwall to meet all the UK’s needs in batteries for electric vehicles, which would be a significant event. The promise has certainly excited punters. Seeking £1.5m to fund further exploration, the company said on Tuesday it had raised £3.8m from 2,200 investors.
One trusts, though, that all those investors have read the recent history of Sirius Minerals, the firm that was going to make its backers fabulously rich by mining for polyhalite, a nutrient-rich mineral, under the North York Moors. That story, sadly, ended with a lowball takeover by Anglo-American, a global giant better equipped to bear the heavy costs of developing the mining infrastructure.
Cornish lithium and Yorkshire potash substitutes clearly have little in common. The latest tale could turn out differently – and one hopes it does. But startup mining ventures are always high-risk, wherever they are. Everybody needs to be clear on that point at the outset.