Rishi Sunak will be delighted. The chancellor told the aviation industry that government-backed bailouts would only be considered “as a last resort”, and here comes engine-maker Rolls-Royce to demonstrate what it can achieve under its own steam.
Rolls’ shareholders should also be pleased. Monday’s dividend suspension is bad news for them, but not half as bad as a rights issue would have been. The latter was avoided (at least for now). Instead, investors got a reassuring display of the company’s ability to absorb financial pain by borrowing more and spending less.
Rolls has drawn down one £2.5bn credit facility and secured a £1.5bn one on top, bringing its overall liquidity to £6.7bn. The cash drag in the other direction is severe, which is only to be expected given that Rolls collected £3.9bn in 2019 via “engine flying hours” (EFH) contracts. With so many planes not flying, the plunge in the EFH line in March was 50%; April’s rate will be worse.
Add it all up, though, and City analysts reckon any financial crisis at Rolls would not appear until the autumn. Remember that two smaller divisions – defence and power systems – are carrying on as normal. And Rolls reckons it can ease its cashflows by £750m this year by cutting spending, not paying a dividend and forcing a temporary 10% pay cut on workers.
The big unknown, of course, is how long airplane fleets will be grounded around the world, and how quickly life will return to normal thereafter. That remains anyone’s guess, and the Rolls chief executive, Warren East, wisely didn’t offer a forecast. But the 18% bounce in the share price tells the story: self-help can keep Rolls’ engine ticking over for a while.
Debenhams puts a brave face on lockdown administration
They’re an optimistic bunch at Debenhams. As the department store chain headed for administration for the second time within 12 months, management whistled about how lenders are supportive and how normal trading will resume when shoppers are allowed to return to high streets. This latest administration is of the “light touch” variety, apparently, and merely designed to forestall legal action from creditors.
One doubts if Debenhams’ suppliers will feel so relaxed since, unlike the last administration, they probably won’t be paid in full this time. Yet, strange as it may sound, Debenhams probably will live to fight another day.
Most of the 22,000 staff can be put on the government’s furlough scheme; and, since even mighty Primark isn’t paying its rent, landlords can be told to go whistle for a few months. After another cull of its stores, Debenhams should emerge in vaguely recognisable form.
Do not mistake survival for prosperity, however. This is more akin to an exercise in financial damage limitation for Silver Point Capital, the US hedge fund now in control of Debenhams. Covid-19 is a huge setback for its plans, but the hedgies need to roll the dice again, keep the business alive and hope something turns up.
Legal & General’s divi isn’t as risky as it seems
As a former Treasury high-flyer, Sir John Kingman knows how to read regulatory breezes. So one suspects Legal & General, where he is chairman, is in the clear on its decision to keep paying a dividend.
The Bank of England’s advice to insurers last week was merely to ensure distributions are “prudent and consistent with … risk appetite”. That was a long way from being an outright ban, as was applied to banks. So, as long as it’s being prudent, L&G should be fine.
And, yes, L&G is being conservative by most measures. Its last solvency reading was healthy. A large chunk of its business these days is fund management, which doesn’t consume vast sums of capital. And its book of annuities is backed by steady long-life assets.
What’s more, there’s a fair argument that putting cash into the hands of investors serves a wider purpose. The money can be recycled and used for rescue fundraisings elsewhere. L&G and Kingman run the risk of being embarrassed if the market shakeout becomes substantially worse, hitting key ratios. But saving the divi looks the right move for now. Someone’s got to give the pension funds some income.