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!
Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.