Virgin Australia enters voluntary administration; buyers seek value

A voluntary administration doesn’t mean that the companies are shut down completely, it enables the administrators to recommend the best possible way of surviving rather than going belly-up.

It presents an opportunity for the company for a proposal to the creditors of the business, thus preserving the company from liquidating. During the administration, the creditor claims are frozen that allows the business to decide the future course of actions.

Despite being on administration, the business has the ability to continue trading. It allows creditors to undertake the review of the business and provides a mechanism to negotiate with the creditors of the business.

Virgin Australia Holdings Limited (ASX:VAH)

Beleaguered airlines, Virgin Australia, has filed for voluntary administration as per its notification to the exchange on 21 April 2020. VAH intends to recapitalise its business and come back stronger.

Its Board has appointed administrators from Deloitte, while its subsidiary – Velocity Frequent Flyer is not in administration. VAH took this decision after having failed funding discussions with parties, including Governments. However, the Company has failed to secure any support yet.

Business will continue to operate as essential flight services continue to serve the Australian community. It is understood that the management team of the business would continue to support the administrators.

One of the administrators noted that they are committed to bringing the business out of administration. Administrators have been progressing on some of the immediate steps.

Administrators have started discussions with the interested parties and noted that buyers are inclined to undertake checks prior to investing.

Paul Scurrah, CEO of Virgin Australia, noted that the business has been part of the Australian tourism industry over the past 20 years. It employs 16k people directly and indirectly, operates flights to 41 destinations.

Virgin Australia has over 10 million members in its Velocity loyalty program. Also, the country needs two airlines, and the Company is determined to operate in Australia, ensuring access to competitive and high-quality travel.

It was noted that the COVID-19 crisis dropped when the business was amid transformation, including route and cost base optimisation, reviewing and renegotiating supplier agreements.

Why no support from the government?

Since the whole of the airline industry is facing tough time, cherry-picking one operator would not bode well for other players. Although the Government had introduced some measures to support the airlines via waving off some duties paid by these businesses.

Looking the shareholding structure of Virgin Australia, majority of the Company is owned by foreign shareholders Etihad Airways - 20.94% stake, Singapore Airlines - 20.09%, Nanshan Group - 19.98%, HNA Group -19.82% and Virgin Group -10.42%.

The Company is majorly owned by foreign investors that might have refused to pump in additional capital – given that the management was looking to fund the business from outside parties rather than its substantial shareholders.

At the same time, the company has been hitting bond markets for its capital needs lately, having raised capital through bonds issued in domestic bourses as well as the US exchanges.

Financials remain bleak

In the half year ended 31 December 2019, the revenue of the group was $3.11 billion, up 1.5% from $3.07 billion in the same period last year. It posted a statutory loss after tax of $88.6 million compared to a profit of $73.8 million in the pcp.

Its air-passenger revenue for the period was $2.85 billion compared to $2.80 billion in the previous corresponding period. Net operating expenditure for the period was $3.01 billion compared to $2.9 billion in the previous corresponding period.

Net finance costs for the period were $193.6 million compared to $79.5 million in the previous corresponding period. At the end of the period, the Company was carrying a cash and equivalents of around $1.11 billion.

Among its current liabilities, interest-bearing liabilities were $542.2 million compared to $771.9 million in the pcp. In non-current liabilities, the interest-bearing liabilities were $4.81 billion.

Buyers are inclined to undertake due diligence

Administrators had also acknowledged that discussions have been taking place with the parties willing to take part in the recapitalisation of the business. Media has been citing numerous names of private equity buyers.

As per the reports, it is believed that BGH Capital, Bain Capital has been in talks with the airlines. Further, potential buyers are speculated to be domestic private equity firms.

Richard Branson of Virgin Group is interested in pumping more money in the airlines, reports suggest he might be willing to mortgage his private islands to stave off his Virgin’s Australian brand name.

Mr Branson also sent a letter to the Virgin Australia team via his twitter account, expressing his support for the airlines. Meanwhile, in New Zealand, the Government had extended a loan of NZD 900 million to Air New Zealand.

In most of the countries, the Government are rescuing airline companies. Being reluctant to do the same, the Morrison Government also faced a backlash from the opposition as well as trade lobbies.

It has been also speculated that the airlines could be in the radar of Oaktree Capital, which is run by legendary investor Howard Marks.

Previously, the air was cleared that Government won’t block any potential takeover of Virgin Australia by a foreign company.

Also, a few rating agencies have further downgraded Virgin Australia in the wake of voluntary administration today i.e. 22 April.