Photo of Simon Jones, J.P. Morgan, Isabelle Cote, Citi and Jennifer Wan, Bank of America Merrill Lynch.
This is a good example of managing relationships with investors, banks, bond holders and the wider equity market when executing funding transactions. Rolls-Royce demonstrates the value of such relationship management when they raised a total of $3.2bn of funding recently.
Mark Brady
Group Treasurer
Rolls-Royce is a global company providing highly-efficient integrated power and propulsion systems and is one of the world’s leading producers of aircraft engines. The company is organised into five customer-facing businesses: civil aerospace, defence aerospace, power systems, marine and nuclear. Rolls-Royce Holdings is headquartered in London, is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index. As of June 2016, it had a market capitalisation of around £11.5bn.
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The challenge
During a challenging period Rolls-Royce needed to navigate its relationships with key stakeholders including banks, bond investors and rating agencies and execute a number of significant transactions to raise funding and diversify its existing investor base.
The solution
During 2015 Rolls-Royce raised a total of £3.2bn of funding in the bank, public bond, and private placement markets. This included an inaugural $1.5bn 144A US dollar bond comprised of a 2.375% $500m five year fixed rate issuance and a 3.625% $1bn ten year fixed rate issuance. The transaction followed a series of successful investor meetings in which the Rolls-Royce team met with around 70 investors in London, New York, Boston and Chicago. The transaction was hugely successful and garnered tremendous demand from investors; a peak order book of approximately $9bn made up of around 230 investors represented the highest level of over-subscription for a European Yankee bond in two years. The transaction has successfully allowed Rolls-Royce to diversify its existing investor base into the US public markets, with 87% of the five year tranche and 96% of the ten year tranche being made up of North American investors.
As part of the wider strategy to increase liquidity, the team also refinanced the core revolving credit facility (RCF) provided by 28 of the group’s key relationship banks. Rolls-Royce successfully upsized the RCF from £1bn to £1.5bn, reduced the drawn margin and commitment fees and extended the maturity by two years to 2020, with two additional one year extension options available (of which one has been exercised).
Further to this, the Rolls-Royce team cancelled a €300m RCF which came with the acquisition of Rolls-Royce Power Systems in 2014 and agreed a new £280m seven year loan facility with the European Investment Bank.
Best practice and innovation
Rolls-Royce has demonstrated first class relationship management with its bank group, bond investors and rating agencies whilst continuing its prudent management of the capital structure.
Strengthening liquidity was a key theme for Rolls-Royce throughout the year and the Rolls-Royce team is particularly mindful of measures needed to maintain its investment grade credit rating. To this end, Rolls-Royce cancelled a £1bn share buyback in July 2015, amid a deteriorating business environment. A total of £500m had been completed. Furthermore, the dividend announced at full year 2015 results was also cut.
Rolls-Royce has previously accessed Eurobond markets for the parent company (both GBP and EUR bonds) and US Private Placement markets for the Rolls-Royce & Partners Finance engine-leasing joint venture. The inaugural Rolls-Royce plc US bond issue was driven by a desire to diversify funding sources and ensure access to bond investors on both sides of the Atlantic going forward, to reduce refinancing risk and demonstrate to existing investors that they had further options available to the Eurobond market. Rolls-Royce overcame the documentation and due diligence challenges of a first time US markets issue and extremely volatile markets to issue a highly successful debut $1.5bn dual-tranche USD bond. The solution of going down the public USD bond market route enabled Rolls-Royce to gain access to the world’s deepest and most liquid bond market. The US market serves as the market for choice for large-scale bond financings and being able to tap this market is a crucial development in Rolls-Royce’s funding toolkit. Rolls-Royce was able to price this debut transaction inside levels achievable in the Eurobond market.
Mark Brady, Group Treasurer, Rolls-Royce Holdings summarises: “In a year that has not been at all straightforward for the group and its treasury team, Rolls-Royce has demonstrated first class relationship management with its key stakeholders to strengthen the financial position of the company. Rolls-Royce has strengthened its liquidity, diversified its funding sources and maintained strong relationships with its banks, bond investors and rating agencies. We are delighted to have successfully executed the inaugural Rolls-Royce plc US bond issue which has further diversified our funding sources.”
Key benefits
- Diversified investor base.
- Fostering of strong relationships with key stakeholders.
- Strengthened financial position.
