Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

HK Type 4 license through Ballingal Investment Advisors Ltd. ("BIA" or "BIAL")

BACKGROUND
I have 20+yrs experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies with most of that time spent managing money. 

4 years in fixed income macro, 8 years running internal hedge fund and 4yrs investment banking at Citi in Japan, 3 years running an Asia multi-strat portfolio at a hedge fund, 4+yrs as an independent special situations analyst.

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<a href="https://www.smartkarma.com/entities/rolls-royce-holdings-plc" target="_blank" data-smartkarma-citation="entities:22121:1" rel="noopener">Rolls-Royce Holdings (RR/ LN)</a> this morning announced a rights offering. It's a biggie. It makes no bones about what it is. There is a handy <a href="https://www.rolls-royce.com/~/media/Files/R/Rolls-Royce/documents/rights-issue/investor-presentation.pdf" target="_blank" rel="noopener">Presentation</a> to go with the <a href="https://www.rolls-royce.com/~/media/Files/R/Rolls-Royce/documents/rights-issue/launch-announcement.pdf" target="_blank" rel="noopener">Announcement</a> and the <a href="https://www.rolls-royce.com/~/media/Files/R/Rolls-Royce/documents/rights-issue/rights-issue-prospectus.pdf" target="_blank" rel="noopener">Prospectus</a>. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/162/902/original/Screenshot%202020-10-01%20at%202.24.06%20PM.png?1601533460" class="editor-image img-responsive" data-smartkarma-image-id="162902"></figure>The total Restructuring Package has several aspects to it and the rights offering is only part of it. The FCF loss of £4bn in 2020 is expected to be offset, over time, with £2bn of rights and £2bn of disposals.<ul>
<li>Cut 9,000 jobs by 2022 (this includes 4,800 already departed)</li>
<li>Reduce the number of sites, and reduce capital intensity in Civil Aerospace</li>
<li>Dispose of at least £2bn in assets (some disposals discussed at results announcement in August)</li>
<li>Launch a £1bn bond offering in the coming weeks</li>
<li>Launch a fully-underwritten £2bn 10:3 rights issue (timetable 6 weeks)</li>
<li>Get a new two-year term loan facility of £1bn (conditional on completion of rights issue)</li>
<li>Get an increase in UK Export Finance extension  of 80% guarantee to increase existing £2bn 5yr loan by £1bn (conditional on completion of rights issue)</li>
</ul>Some of this involves dealing with the refi of existing loans and maturities of revolving credit facilities. Some of it involves trying to recover restructuring costs.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/162/903/original/Screenshot%202020-10-01%20at%202.35.12%20PM.png?1601534174" class="editor-image img-responsive" data-smartkarma-image-id="162903"></figure><h3>The Financing Measures Depend on the Rights Issue</h3>There is £5bn of financing involved in this package. £2bn from the Rights Issue, £1bn from a new bond, £1bn from a new 2yr loan facility, and £1bn from the extension of the UKEF guarantee. ALL of them basically depend on the Rights Issue going through, so the timeline is important. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/162/904/original/Screenshot%202020-10-01%20at%202.41.46%20PM.png?1601534519" class="editor-image img-responsive" data-smartkarma-image-id="162904"></figure>The bond is "expected to be completed within the timeline for the rights issue" but what that likely means is that it will be prepped during October and will be sold after the Shareholder General Meeting has approved the Rights Issue by Ordinary Resolution (and the Rights Issue itself will also be conditional on the Underwriting Agreement having become unconditional in all respects).Rights Issues are often not "fun" for investors. They are often serious business affairs where one has to decide whether to throw good capital after bad. This rights issue has been <a href="https://www.reuters.com/article/us-health-coronavirus-rolls-royce-hldg-e-idUSKCN24U1QH" target="_blank" rel="noopener">somewhat signalled</a> (Reuters article end-July suggested a rights issue) and the difficult financial straits the company finds itself in are not terribly surprising because the plight of airlines has been laid bare. What is somewhat surprising is that many airline company shares have significantly outperformed Rolls shares.For event traders, they can be very fun. There are dynamics to these events which are important. And because rights issues of this level of dilution (10:3) are somewhat uncommon, there are a lot of people who do not understand how they work. The fact that the rights exercise price (GBp32.00/share) is set at a 41.41% discount to the Theoretical Ex-Rights Price is striking. It tells you the underwriters think there is real risk that the stock falls sharply from its TERP before it gets to the actual rights subscription. It also tells you this is much more like a distressed equity restructuring than a regular rights offering. Long only investors and special situations long/short investors should be aware of the dynamics and pitfalls. Investors new to Rolls Royce should be aware of what the dynamics are within the rights trading period.As always, there is much more below the fold.

Rolls-Royce Holdings (RR/ LN) this morning announced a rights offering. It's a biggie. It makes no bones about what it is. There is a handy Presentation to go with the Announcement and the Prospectus. The total Restructuring Package has several aspects to it and the rights offering is only part of it. The FCF loss of £4bn in 2020 is expected to be offset, over time, with £2bn of rights and £2bn of disposals.
Cut 9,000 jobs by 2022 (this includes 4,800 already departed)
Reduce the number of sites, and reduce capital intensity in Civil Aerospace
Dispose of at least £2bn in assets (some disposals discussed at results announcement in August)
Launch a £1bn bond offering in the coming weeks
Launch a fully-underwritten £2bn 10:3 rights issue (timetable 6 weeks)
Get a new two-year term loan facility of £1bn (conditional on completion of rights issue)
Get an increase in UK Export Finance extension  of 80% guarantee to increase existing £2bn 5yr loan by £1bn (conditional on completion of rights issue)
Some of this involves dealing with the refi of existing loans and maturities of revolving credit facilities. Some of it involves trying to recover restructuring costs.The Financing Measures Depend on the Rights IssueThere is £5bn of financing involved in this package. £2bn from the Rights Issue, £1bn from a new bond, £1bn from a new 2yr loan facility, and £1bn from the extension of the UKEF guarantee. ALL of them basically depend on the Rights Issue going through, so the timeline is important. The bond is "expected to be completed within the timeline for the rights issue" but what that likely means is that it will be prepped during October and will be sold after the Shareholder General Meeting has approved the Rights Issue by Ordinary Resolution (and the Rights Issue itself will also be conditional on the Underwriting Agreement having become unconditional in all respects).Rights Issues are often not "fun" for investors. They are often serious business affairs where one has to decide whether to throw good capital after bad. This rights issue has been somewhat signalled (Reuters article end-July suggested a rights issue) and the difficult financial straits the company finds itself in are not terribly surprising because the plight of airlines has been laid bare. What is somewhat surprising is that many airline company shares have significantly outperformed Rolls shares.For event traders, they can be very fun. There are dynamics to these events which are important. And because rights issues of this level of dilution (10:3) are somewhat uncommon, there are a lot of people who do not understand how they work. The fact that the rights exercise price (GBp32.00/share) is set at a 41.41% discount to the Theoretical Ex-Rights Price is striking. It tells you the underwriters think there is real risk that the stock falls sharply from its TERP before it gets to the actual rights subscription. It also tells you this is much more like a distressed equity restructuring than a regular rights offering. Long only investors and special situations long/short investors should be aware of the dynamics and pitfalls. Investors new to Rolls Royce should be aware of what the dynamics are within the rights trading period.As always, there is much more below the fold. 

International Consolidated Airlines Group (IAG LN)

International Consolidated Airlines Group

Rolls-Royce Holdings

Rolls Royce Rights Roll Right Over You