Can a liquidity boost drive up the Rolls-Royce share price?
Rolls-Royce shares have fallen sharply during the coronavirus pandemic, but cash reserves of £6.7 billion will help to stave off financial crisis in the short term.
On 6 April, Rolls-Royce announced the suspension of dividends for 2020, postponing payments of £137 million to shareholders. Salaries across the workforce have been cut by at least 10%, with senior management reducing pay by 20% as well as deferring bonuses.
This would traditionally paint a picture of a company in dire financial straits, but these moves have become commonplace across several industries as the coronavirus pandemic continues to unfold.
A typical corollary of dividend suspension is a decline in shares, but Rolls-Royce's share price moved in the right direction following the news.
A £1.5 billion boost in the company's liquidity enabled Rolls-Royce shares to close on 6 April at 297.7p, a gain of over 18% from the previous day of trading.
Boost in liquidity improves Rolls-Royce shares
Rolls-Royce has been able to significantly swell the company's liquidity via a number of sources.
Reductions in the everyday operation of the company are projected to save the company around £750 million, a figure that incorporates those savings on dividend payments and employee salaries.
The engineering giant opted to draw down on a credit facility worth £2.5 billion while securing a £1.5 billion revolving credit commitment from a consortium of banks.
All of these measures have contributed to the company's overall liquidity reaching a level of £6.7 billion.
Warren East, chief executive at Rolls-Royce, justified these steps as 'significant measures to strengthen the operational and financial resilience of our business'.
No amount of cash reserves will put planes back in the air or revitalise the automotive industry, but it can buy Rolls-Royce time. The company will now be able to tread water for longer until a semblance of normality returns to its industries.
Rolls-Royce now looks financially secure until the back end of 2020, when the longevity and scale of the coronavirus outbreak may become clearer. At this point, businesses will be able to draw up long-term forecasts with greater confidence.
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Rolls-Royce price movements indicative of struggles in automotive industry
While this influx of liquidity may only provide temporary relief, it has given fresh impetus to the Rolls-Royce share price. On 9 April, Rolls-Royce shares ended the week of trading at 350.2p.
At the end of the previous week of trading (3 April), that share price was down at 251.6p. In the week leading up to the Easter weekend, its shares soared by 39.1%.
This was a much-needed rebound for a company that has seen its share price approximately halve in value during the coronavirus pandemic. The challenging conditions presented by Covid-19 have ground the aviation and automotive industries to a standstill, with shares suffering accordingly.
New car sales in the UK last month fell by 44%, with 203,000 fewer units sold in comparison to March 2019. In early April, Ian Henry of AutoAnalysis estimated that the European car industry would be hit with a £58 billion loss of sales if production remained suspended until the end of the month.
It is likely that governments will extend the ban on production beyond the end of April, while any return to production could be short-lived if relaxed lockdown measures prove ineffective.
Civil Aerospace, the largest division of the Rolls-Royce group, has been severely affected beyond the question of production; its servicing facilities have been rendered obsolete by the grounding of fleets of planes.
That has dammed a significant revenue stream for Rolls-Royce, although cash reserves just shy of £7 billion will soften the losses to an extent.
The initial share price bounce from the liquidity boost was negated following the Easter weekend, with Rolls-Royce shares shedding 11% in two days of trading.
On 16 April, Rolls-Royce opened trading at around 325p, a 5% rise on Wednesday's close. This could be a rare moment of respite in what will continue to be challenging times for Rolls Royce's share price.
How to take a position on Rolls-Royce
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