What can its bond issues show us about the Rolls-Royce share price?

Though often seen as opposites, I think the recent bond issues at Rolls-Royce can tell us a lot about the future of its share price.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Bonds and shares are often seen as opposites by many investors. This is not exactly true, though. While debt and equity are to a certain extent opposite, as investments they are more like two sides of the same coin. This is why I think its latest bond issues have a lot to tell us about the Rolls-Royce (LSE: RR) share price.

What moves a share price moves a bond yield

So we are all on the same page, a quick explanation about bonds. A bond is simply a securitised loan. Rather than borrowing from a bank, a company (or government) allows people to ‘buy’ its debt – loaning it money – for a guaranteed interest rate (called a yield).

As with a personal loan, a company’s ability to borrow money is subject to a credit score (for bonds, this is a credit rating set by three main ratings agencies). The higher the chances of not being able to pay back its debt, the higher yield a company is forced to offer to entice people to buy its bonds.

The similarity with shares, then, is easy to see. The same prospects that determine a share price are mostly the same factors that influence the yield a firm must offer in its bonds. Things like earnings, broader market trends and the global economy impact both. Good prospects mean a high share price and a low yield, and vice-versa.

The Rolls-Royce yield vs. the Rolls-Royce share price

In the case of Rolls-Royce, we can see this quite clearly in its latest bond issue. Last month the company issued £2bn worth of bonds in the European markets. Across three countries, these six-year bonds had yields ranging from 4.625% to 5.75%. The European benchmark for the six-year bond is currently just 3.73%.

For those of us who look more often at the Rolls-Royce share price, this did not come as a surprise. The risks are obvious: the UK is now in a second lockdown; coronavirus looks set to dominate the global markets well into 2021; a vaccine, meanwhile, still seems to have a lot of questions surrounding it.

Would you feel secure lending Rolls-Royce money right now?

The Rolls-Royce share price is almost a quarter of the value it was at the start of this year. The company makes most of its money from the maintenance of its engines, in addition to selling them in the first place. If planes are not flying, they don’t need their engines maintained.

Even worse, it seems like the airline industry may be suffering a once-in-a-generation catastrophe. Who knows how long it take to will recover? A global economic recession is a real possibility. If this happens, airlines will be going from the frying pan into the fire.

Rolls-Royce needs money

The bond issue does not just reinforce what we already know, however. It could also have an impact itself. The company needs money. Last month it announced a £2bn rights issue (a more direct hit to the Rolls-Royce share price) as well as the bonds.

With these yields being so high, the company has committed itself to large loan repayments. This could be a drain on cash flow at a time when it can’t afford it. Its bond may not just have things in common with the Rolls-Royce share price, but may even be a driver of it in the future. As such, I’m unlikely to buy the shares for my own portfolio any time soon.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Karl Loomes 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.

More on Investing Articles

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »