The last week was a steady one for the FTSE 100, which gained 115 points to end 2% up, leaving it at nearly 6,017 points.
FTSE 100: awful in 2020
Even after steady gains since September, the FTSE 100 has had a brutal year. It has dived 1,525 points in 2020, down 20.2%. Of course, this collapse is largely down to one thing: the economic havoc caused by Covid-19 (plus a slump in the oil price).
Air travel experiences extreme turbulence
Since restrictions on air travel were imposed in early 2020, airline miles flown have collapsed by up to four-fifths. Thus, the FTSE 100’s worst performers are companies tied to the airline industry.
For example, shares in International Consolidated Airlines Group – owner of British Airways, Iberia and Aer Lingus have crashed by 64.8%, losing almost two-thirds of their value in 12 months. But IAG isn’t the worst performer in the FTSE 100 over the past 12 months. Last place goes to aero engine maker Rolls-Royce (LSE: RR), whose stock has collapsed by 69.3% in 12 months.
This FTSE 100 share flew this week
Although Rolls-Royce shares have crashed by almost seven-tenths in a year, they enjoyed a spectacular advance this week. They closed at 223.2p – up 109.6p (96.5%) on last Friday’s close. Hence, this FTSE 100 share has almost doubled in a single week.
Having hit a low of 100.8p set on 2 October, Rolls-Royce shares have soared 121% above their nadir. However, given that they hit a 2019/20 peak of 792p on 7 November 2019, Rolls-Royce shares have still suffered a spectacular fall.
Rolls-Royce to raise £5bn in extra liquidity
What’s caused this dramatic turn of events for Rolls-Royce? And is this FTSE 100 share on the long haul to recovery or on a flight path to ruin?
This week’s rise was down to improving market sentiment after Rolls-Royce announced a £2bn rights issue to strengthen its balance sheet. In addition, the FTSE 100 firm will raise £1bn from selling bonds and secure £2bn in additional loans. Half of the £2bn of new credit comes in the form of a five-year loan backed by an 80% guarantee from government credit agency UK Export Finance.
Thus, with support from its shareholders, bond investors and lenders, this FTSE 100 member will gain up to £5bn in extra liquidity to see it through this crisis. Then again, Rolls-Royce burned through £2.8bn in cash in the first half of 2020, leaving it with £1.7bn of net debt (excluding leases). Furthermore, before the end of 2021, Rolls-Royce has to repay £3.2bn in maturing debt.
What next for Rolls-Royce shares?
Even with a further £2bn from selling non-core businesses, Rolls-Royce could face future liquidity problems. It will soon have enough to fund at least another year of survival. But if rolling Covid-19 waves persist, the FTSE 100 firm could run out of cash in 18+ months.
Today, Rolls-Royce is worth just £3.77bn – about a fifth of its market value in August 2018. With civil aviation under the cosh and unlikely to recover before 2022, this world-class British business faces huge challenges. It must overcome these hurdles hobbled by a greatly enlarged debt pile.
To sum up, the share price doubling in a week is great news for shareholders of this FTSE 100 fallen giant. However, until air travel is back on a steady flight path, Rolls-Royce faces existential crises. Hence, if I owned the shares (which I don’t), I would head for the emergency exits today!
