LONDON (S&P Global Ratings) --S&P Global Ratings said today that Rolls-Royce PLC's guidance of a cumulative additional cash burn over 2020-2021 of about £1 billion, versus S&P Global Rating's previous expectations, primarily as a result of lower flying hour expectations in 2021, will offset about half the boost from the £2 billion capital increase completed in November 2020. As the second and third waves of COVID-19 outbreaks have hit Europe and North America, governments have returned to implementing strict measures to contain the pandemic, including national lockdowns and travel restrictions. Significant uncertainty therefore remains on the recovery of long-haul flying hours in 2021 and beyond, which could hit airlines' and original equipment managers' (OEM's) production rates.

We are maintaining the CreditWatch negative on the long-term issuer and issue ratings on Rolls-Royce until around the time of the group's next trading update in March 2021. At that stage, we expect Rolls-Royce will publish its full-year 2020 results and offer further details as to the pace of recovery in flying hours; management's progress in right sizing the business, cutting costs, and restoring profitability; potential asset disposals; and progress on delivering on working capital targets. We also expect management will provide more detail on its expectations and strategy for 2021. We placed our 'BB-' ratings on Rolls-Royce on CreditWatch negative in September 2020 (see "Rolls-Royce PLC Downgraded To 'BB-' And Placed On CreditWatch Negative," published on Sept. 11, 2020).

Despite the successful completion of a £2 billion rights issue and raising £3 billion in new debt facilities in late 2020, which bolstered Rolls-Royce's liquidity, conditions in the civil aerospace industry have continued to deteriorate. In our view, Rolls-Royce's profitability will remain under pressure, coupled with a higher rate of cash burn and weaker deleveraging prospects than we previously assumed. The group has just revised its expectation for 2021 wide-body flying hours to 55% of 2019 volumes versus its expectation of 70% previously. Since our last publication, the group has also updated the market to the effect that its financial year 2020 free cash flows will be minus £4.2 billion (versus the minus £4.0 billion it previously guided). It also now expects to post minus £2.0 billion of free cash flows in 2021 versus the about minus £1.2 billion we previously assumed in our base case. Rolls-Royce's revised expectation on the rate of cash burn, an aggregate of minus £1 billion more over 2020-2021 versus our previous expectation, will account for about half of the £2 billion rights issue proceeds raised in November 2020.

Under our previous base case (and including the £5 billion recapitalization package), we expected Rolls-Royce's S&P Global Ratings-adjusted debt to rise to about £5.8 billion in 2021. Considering its revised cash flow guidance for 2020 and 2021, we now expect its 2021 S&P Global Ratings-adjusted debt to rise to about £6.8 billion.

Given the very tough trading environment, management's actions to reduce the cost base in line with lower demand from airline and civil aerospace OEMs are vital. Management is lowering the cost base and headcount, and is rationalizing the production footprint to improve margins. Ultimately, it aims to return to positive free cash flow generation. This will be crucial to the long-term trajectory of the rating. Management is still guiding a return to positive cash flow in the second half of 2021.

This report does not constitute a rating action.

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