Terry McCrann: Bain won the right for Virgin and bondholders might be relieved to have come second
Virgin Australia suitor Bain was always going to walk away from international flights but it wouldn’t have expected domestic ones to continue to be tied down. Terry McCrann questions the future of the deal.
Terry McCrann
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In the two-horse race for Virgin Australia, will the “winner” — as the old joke has it — be the one of the two which finishes second?
So far as the administrator of the failed airline is concerned, there is only one contender: the investor group led by the US vulture fund — sorry, my apologies, the esteemed investment operation — Bain Capital.
The administrator, Deloitte, went through a very rigorous examination of the proposals from the motley collection of bottom-feeders and came down on the side of Bain.
It ruled everyone else out and they’ve all accepted the decision and departed the scene. Enter then two players from among the bondholders owed in total some $2 billion (of the $6.8 billion total Virgin debt).
They’ve made a counter-proposal and have been demanding that Deloitte allow it to be taken to the creditors’ meeting.
Not surprisingly, Deloitte has said no. It has a deal with Bain; and more particularly, it is a binding deal — binding on both parties, subject of course to approval by the creditors.
Now I suppose that at some theoretical level the two proposals could go to the meeting. If creditors approved the Bain deal, that would be it and the bondholder proposal would die. But if they rejected Bain, they could embrace the bondholder one.
Note, Virgin shareholders are totally irrelevant. Nobody has to get them to approve anything; nobody has to offer them anything. To stress, there is no “offer” to Virgin shareholders; they just have to cop the outcome, which for them is zero, zip, nada, nothing.
Don’t waste any tears on them. They are mostly — holding well over 90 per cent — five major offshore investors, among them of course Richard Branson’s group.
They all knew exactly what they were doing with Virgin; running it essentially as a front for their strategic games. The shares were almost worthless before the virus struck and closed virtually all global air traffic.
Now, a critical and arguably the overwhelming deciding factor in the decision by Deloitte to embrace Bain and Bain exclusively was Bain’s preparedness to pump in real, and significant, dollars upfront — before creditors had actually approved its proposal at a meeting scheduled for August 22.
This does work to make it all but impossible for creditors to reject Bain; they would have to repay the money and that would reduce any amount available for themselves.
But the driver was as much JobKeeper as Bain’s money. With 9000 employees, keeping Virgin functioning, at least through to the meeting, meant JobKeeper is pumping $6 million a week into Virgin.
True, it then flows straight out to those employees, but it’s a critical part of keeping all the balls in the air, with those Virgin staff a key — arguably the key — component not only of any future Virgin 2.0 but in the actual approval process.
We don’t know the detail of what Bain is proposing; except it does involve pumping in significant new money, both in this interim and after it wins — ditching at least half of Virgin’s planes and cutting staff down to around 4000.
Deloitte has refused to disclose the details and that was the big thing the bondholders wanted when they went to court.
Now Bain is no White Knight. It’s entirely focused on making a lot of money out of Virgin 2.0. It will make the money by wiping out the existing debt, paying cents in the dollar, and ruthlessly pruning the future operation.
But it made its calculations and its commitments before the second wave in Victoria — and more importantly, the elevation of Australia’s second biggest population group to national pariah status. Melbourne-Sydney is one of the top six busiest flight hubs in the entire world; flying it in significant numbers would be absolutely central to Bain’s plans for Virgin 2.0.
Now Bain’s plans for Virgin — and more importantly (to it) its profit expectations — could well survive the new six-week Victorian lockdown and the supposed ring of steel put around the pariah state.
But what if six weeks becomes 12 weeks? Or worse, 26 weeks? And still the planes aren’t flying?
The broader point is the sudden flare-up in Victoria and perhaps even more disturbingly, the cluster in Sydney, emphasises the risk we could get more flight lockdowns for months if not indeed years.
Clearly Bain was always going to walk away from Virgin’s international flights. But it certainly did not expect that even the domestic ones might stay locked in cold storage.
Right now it’s a binding deal. Clearly, Deloitte does not want anything to pop up that could allow Bain to walk away.
The administrator believed it had forged the best possible deal for creditors before Melbourne went back into lockdown and the entire state quarantined from the rest of Australia.
That deal must be looking even better now — at least to Deloitte. When and if the bondholders get to see it, they might be happy to run second.
MYSTERY OF THE PANEL
The strange case of the Virgin bondholders and the Takeovers Panel has come and gone.
A week ago two groups of bondholders demanded the Panel interfere in the Virgin deal with Bain. Now they’ve said: forget about it.
The Panel said “OK” — but only after deciding that it was “not against the public interest”. It allowed the application’s withdrawal without ever having actually said it would accept the application!
In “due course” it’s going to tell us why it allowed the withdrawal; it should tell us why it didn’t reject the applications upfront and immediately.
Originally published as Terry McCrann: Bain won the right for Virgin and bondholders might be relieved to have come second