Terry McCrann: Virgin will burn $5bn to fly into 2021

The little matter of some $6.8bn of debt that gets ‘vanished’ is a rather important item that was missing from the outline of the fantastic Virgin 2.0 and its glorious future that will emerge from the ashes of Virgin 1.0, writes Terry McCrann.

One rather important item is totally missing from the very upbeat – even enthusiastic – outline of the fantastic Virgin 2.0 and its glorious future that will emerge from the ashes of Virgin 1.0.

It’s the little matter of some $6.8bn of debt that gets ‘vanished’ – Pfft! – ahead of all this.

Just exactly how much creditors are going to ‘contribute’ to building that glorious future remains one of the most closely-guarded secrets in Australia, only to be revealed as late as possible before the next creditors meeting.

From, though, the very indirect references to the matter in Wednesday’s statement, it suggests to me they’ll be asked to give up at least $5bn and because staff creditors won’t be losing anything, that will add to perhaps 90c in the dollar for those other creditors.

True, they will be given shares in Virgin 2.0 as part of the package – so their losses, at least on upfront paper, will be less.

But if Virgin 2.0 fails to fly into that glorious future, shares in Virgin 2.0 could very well and very quickly end up being worth exactly the same as those in Virgin 1.0. Nothing. Nada. Zero. The big fat O.

If Virgin 2.0 fails to fly into that glorious future, shares in Virgin 2.0 could very well and very quickly end up being worth exactly the same as those in Virgin 1.0. Picture: David Clark Photography

Now true, Wednesday’s statement was not about the process of dealing with Virgin 1.0’s insolvency and hauling it back from liquidation. It was all about the – Intended? Expected? Hoped-for? – life after the asterisk.

That asterisk is of course that the ‘sale’ of ‘Virgin 1.0 morphing into Virgin 2.0’ is approved by those very same creditors through – as the Virgin statement put it, the “preferred method’ of – a Deed of Company Arrangement (DOCA).

What has not received much airplay – if the Virgin administrators Deloitte have made any public reference to it all, they have done so multi sotto voce – is that the administrators are making creditors one of the classic offers they literally cannot refuse.

The ‘preferred method’ of turning Virgin 1.0 into Virgin 2.0 and vanishing $5bn of debt is, as noted, the DOCA. But if creditors reject it, Virgin is sold anyway.

Bain has a binding deal to get Virgin either via the DOCA or failing that with all the assets sold directly to it instead.

Deloitte will argue that creditors would lose even more if they forced that alternative; and they would also lose the potential, ahem, upside of shares in Virgin 2.0.

No wonder what is effectively the buyer Bain, speaking under the Virgin banner, could paint such a glorious future, built crucially on a “strong balance sheet worthy of an investment grade rating”.

That translates to: after we’ve ‘vanished’ most of the existing debt.

That suggests to me that Virgin 2.0’s debt will be under and probably well under $1bn – all ‘donated’ so to speak by the current creditors.

It’s very nice if you can get it. Let me propose an example that’s easier to imagine in the personal context.

Imagine you borrowed $2m to buy a home worth, say, $2.5m. Wouldn’t it be great if you could fashion some financial wizardry and have your debt ‘restructured’ to say $400,000 and still have ownership of the home?

That’s broadly what Bain is doing – with one important difference.

It’s actually had to put some money in – like, say, $400,000 in my house example.

So, it has put in $400k; it has another $400k of debt, and owns a house that it hopes will be worth $2.5m, or maybe, say, $1.5-2m in a softer housing/aviation market.

But what if it gets not a ‘softer’ market but one that is near-permanently deflated? Which brings us to two more unstated asterisks.

Virgin Australia CEO and managing director Paul Scurrah. Picture: Getty Images

The first and most immediate is an assumption that Victoria’s Lockdown 3.0 ‘works’ and is ended in mid-September. More broadly and also more specifically, that we get back to something like regular flights between Melbourne and Sydney: the absolute core of any successful Virgin 2.0.

The second assumption/asterisk blends into this but also goes broader.

This is, in essence, that we get an effective vaccine and we get it pretty quickly (at the latest by mid-2021).

The Bain Virgin 2.0 talks about resuming international long-haul flights; but that’s somewhere on the other side of a vaccine.

There is no way, no way, that Virgin 2.0 could do so absent a vaccine.

Qantas could (and will), with great difficulty, but Virgin, no.

Virgin 2.0 might talk about an international manana, but for the foreseeable future is giving away all its aircraft that could fly those.

That asterisk, though, also plays ominously into the domestic state of play. Absent a vaccine (or intelligent virus treatment) does anyone seriously suggest we will get back to normal aircraft travel within Australia anytime soon?

Look at Queensland – yes, with an eye to a certain election – closing its border with NSW.

Importantly, Deloitte did the deal with Bain before the Victorian quarantine stuff-up emerged and the state moved to Lockdown 3.0. Deloitte would not be able to do as good a deal now.

Yes, Bain – mostly through greed as its deal metric – would have built in some buffer to survive Victoria’s Lockdown and in particular the continued near total closure of Melbourne-Sydney.

But if six weeks becomes 12 weeks? And if six weeks becomes 12 weeks and NSW follows Victoria? Hmm.

Now Bain has also ‘built’ in some fat – getting $250m from a desperate Queensland government and having JobKeeper pretty much pay its wages bill through March.

But again; after that?

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Originally published as Terry McCrann: Virgin will burn $5bn to fly into 2021