With dollars earnings expected to decline markedly in the medium term Rolls-Royce has paid £1.45 billion to restructure it hedge book, according to a stock exchange release today.
“Due to the deterioration in the medium-term outlook caused by COVID-19, absent mitigating actions, we forecast a shortfall of US$ denominated cash receipts over the next seven years compared to our hedged position. As a result, it is financially prudent to mitigate the future risks of this hedge book by closing out hedges that are no longer required,” the firm said in a statement.
The restructuring saw Rolls-Royce reduce its total hedge book from $37 billion to about $27 billion. The £1.45 billion cost of the restructuring is made up of £100 million of cash costs in 2020, £300 million in each of 2021 and 2022, and £750 million spread over 2023 to 2026.
The related underlying financing charge will be recognised in Rolls-Royce’s first half 2020 earnings. It is the latest of series of major hedging losses by aviation firms due to Covid 19, with Lufthansa reporting nearly a €1 billion loss of its fuel derivatives exposure, while IAG is on course to lose $1.6 billion in the same way. By contrast Goldman Sachs commodities traders have reportedly made $1 billion in profit so far in 2020 - their best performance in over a decade.
Rolls-Royce also reported in its stock market announcement that it had commitments for a new 5-year term-loan facility of £2 billion underwritten by a syndicate of banks and to be supported by a partial guarantee from UK Export Finance, which has not yet been drawn. Rolls-Royce has pro-forma liquidity of £8.1 billion including an undrawn revolving credit facility of £1.9 billion and its cash balance was £4.2 billion at the end of June.