Best Funding Solution Highly Commended: Rolls-Royce plc

Published: Sep 2021


Photo of Marcus Dix, Group Treasurer.

Marcus Dix

Group Treasurer

Rolls-Royce plc is a British multinational company established in 1904 which today is a leading global manufacturer of aero-engines, gas turbines and reciprocating engines, with operations in three principal business segments – Civil Aerospace, Defence and Power Systems.

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UK Export Finance’s Export Development Guarantee scheme helps Rolls-Royce access high value loan facility to support liquidity needs

The challenge

Since the outbreak of the coronavirus pandemic, there has been an unprecedented drop in demand for air transport. Rolls-Royce derives around 20% of its revenue based on aero engine flying hours under long-term service agreements with customers. The sustained period of lower traffic and aircraft groundings affected Rolls-Royce as airlines deferred capital expenditure and operated aircraft at reduced capacities, placing pressure on the company’s financial performance, liquidity and free cash flow generation.

Whilst the company entered 2020 with committed borrowing facilities that provided strong headroom to ensure a strong liquidity position and manage upcoming debt maturities, the company needed to take swift action to conserve cash and bolster liquidity significantly in light of the uncertain macro outlook.

Within a short period of the outbreak the company had launched self-help measures to deliver over £1bn of cash savings in the year and bolstered liquidity through an additional £1.9bn RCF. The latter, alongside credit rating downgrades and the uncertain macro outlook, placed pressures on further bank credit capacity at a time when their capacity and capability was being increasingly stretched by a significant volume of similar requests from other companies. The prolonged grounding of aircraft meant the company knew it needed to take further prompt action to provide improved financial resilience to weather the immediate storm and allow time to conduct a more detailed review of its business and capital structure by assessing a number of different outlook scenarios.

The solution

The company wanted to secure commitments for an additional £2bn debt facility quickly without consuming too much credit capacity from its banking group and at a time when a successful bond issuance could not be guaranteed. Given the strategic importance of Rolls-Royce to the UK economy as a major exporter, the company approached the UK’s export credit agency, UK Export Finance (UKEF), in May to access the Export Development Guarantee (EDG) product. Rolls-Royce was already familiar with the product which was introduced by UKEF in 2019 and supports exporters’ general working capital requirements.

“As one of the UK’s largest exporters, we sought a £2bn facility. The successful syndication and strong lender appetite meant we also secured agreement for an additional £1bn to be availed under an accordion feature if subsequently required”, explains Marcus Dix, Group Treasurer.

The initial facility undertaken was a five-year bullet loan facility benefiting from an 80% guarantee provided by UKEF.

To provide certainty of deliverability, Rolls-Royce requested four banks, Citi, Credit Agricole, HSBC and J.P. Morgan, to underwrite the facility which was subsequently syndicated out to a group of 13 lenders. The transaction was significantly over-subscribed, as banks saw the facility as a way of supporting the company in a capital friendly way. In addition to providing an attractive new source of liquidity to the group, the loan assisted the company in building its credit story by underscoring UK government commitment to the company as an exporter. This is a landmark transaction in the UK and a demonstration of the new powers UKEF have to support UK exports. Linklaters acted for the lenders and Slaughter & May for the borrower.

Best practice and innovation

This deal was the largest EDG transaction to date and the first Export Development Guarantee to be underwritten versus clubbed, as banks get more familiar with the marketability of the structure.

The transaction involved the coordination of a large syndicate of banks at a time when the majority in the industry had, in some form, their working capital patterns severely disrupted. Furthermore, the transaction was undertaken at the height of the COVID-19 crisis when there was limited liquidity in the commercial market.

Key benefits

    • Provided £2bn of five-year liquidity at a time of reduced market capacity.
    • Additional untapped pool of liquidity with lending banks treating the UKEF guaranteed portion as UK government risk and therefore preserving banking capacity for additional company needs.
    • Assisted in building the credit story by underscoring UK government commitment to the company and its access to this funding source.
    • Approving an additional financing amount upfront enabled further access to the EDG scheme in a timely way in 2021.

The Adam Smith Awards is the industry benchmark for best practice and innovation in corporate treasury. The 2021 Awards attracted a record-breaking 309 nominations spanning 40 countries. To find out more please visit: https://treasurytoday.com/adam-smith-awards.

Julia Hsu

Head of UK Diversified Industrials Corporate Banking

Youngsik Ahn

Export Agency Finance, Treasury and Trade Solutions

Rolls-Royce wanted to ensure sufficient financial flexibility as it managed through the COVID-19 crisis. Rolls-Royce sought a £2bn Export Development Guarantee five year term loan of which 80% was UK Export Finance guaranteed. To ensure financing certainty, Rolls-Royce asked Citi and three other banks to underwrite the entire facility amount, and the deal was then syndicated to its relationship banks. The deal is special since it is one of the largest UKEF supported transactions with a large syndicate of banks, especially when the aviation industry was severely disrupted and faced limited liquidity in the commercial market.

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