We have been following the plight of Rolls Royce Aero-engines in the NTI newsroom for a while and watched with amazement when, last week, their stock blasted onto the 'must buy' listings with some of the most rapid growth in the company's history. Is it just us, or do you also think that the financial markets make all of this up as they go along?
Today (Thursday 15 October) it is reported in the Financial Times that they and Jaguar Land Rover, another cyclopean British brand, have both dipped into the bond markets for much-needed funding in the past week, with investors demanding hefty interest rates from businesses crippled by the events of this year (which is much like asking to sit down in a wheelchair and asking its former occupant to nip out and buy you a pizza).
But borrowing money comes at a price for lame businesses, despite the fact the Bank of England were circularising lenders this week about the possibility of interests rate falling to 0.001%. Rolls-Royce was set to issue £2 billion worth of bonds on Wednesday as part of a rescue package that also includes a rights issue of equity. Two years ago, the company was able to borrow six-year debt for just 0.875 per cent. This time, debt spread across three currencies comes with coupons between 4.625 per cent and 5.75 per cent. This is way above the European benchmark of 3.73 per cent.
This is comparable to Jaguar Land Rover last week issuing $700 million worth of five-year bonds with a coupon of 7.75 per cent. All of this demonstrates that yield-hungry investors are receptive to companies disrupted by the pandemic, but are prepared to bring a shovel to negotiations to graphically point out the starkness of the options open to the party on the other side of the table. In May, rating agency S&P downgraded Rolls-Royce by two notches, giving it a speculative 'junk' rating for the first time in 20 years. Jaguar's rating sank from BB- to B+ in April, deeper into junk territory, a status that excluded it from accessing the Bank of England’s finance support scheme.
By contrast, Billy mysteriously paid £200 off his Mastercard last week, raising his status from 'beaten up in an alley' to 'we will be back next week with a spanner'.