The risk of a rights issue continues to weigh on the shares Rolls-Royce confirmed on Friday it is reviewing options to strengthen its balance sheet, stating no decisions have been made regarding potential disposals, which could include ITP, or a rights issue, which the press said were being considered to raise GBP1.5bn-2bn of fresh cash. We provide an analysis of the group''s indebtedness and conclude that given the potential to return to levels compatible with an investment grade rating by 2022, availability of liquidity and disposal options, launching a rights issue with the H1 trading update on 9 July may be premature. Indicative flight hours and cash flow trends from H2 should be a key focus of the update, in this context. H1 set to be poor operationally and due to one-off items We expect RR to post GBP(771)m in operating loss in H1, with a FCF at GBP(2.9)bn. This performance would be largely driven by Civil, where we factor in a GBP500m non-cash retrospective adjustment and see flight hours cash inflows dropping 65%. Other key items which could put some pressure on RR''s performance would include potential cash losses on over-hedging for 2020, along with some intangibles and tax asset write-downs. We are less concerned by the last two, being non-cash and reflecting the well-known depreciated weakened outlook. EPS cut as we reflect a steeper downturn, factor in GBP1bn of equity raise We adjust our estimates to reflect weaker air flight hours developments in 2020 (-65% yoy vs. 55% previously) and higher working capital cash burn in 2020, recovered in subsequent years. We also include a GBP1bn rights issue, which we feel would be enough, along with some facilities disposals and earnings and FCF recovery, to return to investment grade rating by end 2021. All in all we cut our EPS by 30% in 2021 and 18% in 2022. Valuation remains appealing although balance sheet concerns drive volatility On a medium-term view, thanks to the restructuring...