Bain billions keep Virgin aloft as private equity giant takes over liabilities

Bain Capital plans to inject as much as $600m in cash into Virgin to keep it running as it works with administrator to help the airline ramp up operations.

Mike Murphy, Bain Australia CEO. Picture: John Feder

Bain Capital plans to inject as much as $600m in cash into Virgin to keep it running as it works with administrator Deloitte’s Vaughan Strawbridge to help the airline ramp up operations after months of uncertainty about its future.

The upfront cash is part of a package of some $1.65bn which Bain is prepared to inject into Virgin, including $600m to take over existing travel credits for its passengers and some $450m in entitlements owed to Virgin staff, in a deal struck on Friday to buy the airline.

The deal secures Virgin’s future after it fell into administration on April 21 with debts of some $7bn. The federal government had refused weeks of appeals to provide financial assistance to the airline, which was forced to shut down most of its operations due to COVID-19 travel restrictions.

The Bain deal followed an angry statement by rival bidder Cyrus on Friday morning, which said it was withdrawing its bid “due to lack of engagement” by Mr Strawbridge.

The New York-based hedge fund claimed that its improved bid, lodged on Thursday, had not been given proper consideration by Mr Strawbridge.

Bain’s potential cash injection of some $1.6bn will be in addition to taking over Virgin’s liabilities for other creditors, including its aircraft leasing deals.

But it is uncertain what the deal means for the airline’s unsecured creditors, owed $2bn, who lodged their own bid for Virgin this week and could play a key role in the meeting of creditors, due for late August, which still has to approve a proposal by Mr Strawbridge.

Bond holders fear that a deal done while Virgin is on its knees in the current COVID-19 environment could mean that they get almost nothing as part of the sale process.

The bond holders have not yet been told the details of the Bain offer.

A spokesperson for the bond holders said on Friday they were “disappointed that the administrator had announced a successful bidder for Virgin Australia without due consideration of our recapitalisation proposal”.

He said the bond holders believed their recapitalisation proposal represented “the best option for Virgin, the employees, creditors and the Australian community.”

The bond holders’ plan, which involved an upfront investment of some $125m in the airline, would have seen it return to the ASX as a listed company.

The bond holders said they would continue to press their case for their proposal to be considered by Virgin’s administrator.

“We will continue to push for a genuine consideration of our proposal in the interests of Virgin employees, stakeholders and creditors, including the thousands of Australian retail bond holders and institutions which have already invested $2bn in the airline,” he said.

“Otherwise, as a result of the administrator’s decision, the inevitable outcome of the Bain proposal is that investors are left with a very poor recovery which is a manifestly unjust outcome.”

Bain is also now battling concerns that it could go ahead with major lay-offs, with its chief deal-doer, Bain Australia managing ­director Mike Murphy, telling media hours after it signed the deal with Mr Strawbridge that the Bain agreement could see the loss of up to 4000 of the 9000 jobs at the airline over time.

The Bain camp was scrambling on Friday afternoon to talk down the media reports of major job losses, which come as Qantas announced plans to lay off some 6000 workers as a result of the COVID-19 crisis.

Bain sources were explaining that the exact number of staff to be kept by its new owner would depend on market conditions and the ability of Virgin to resume domestic flights.

But by coming out so quickly with estimates that Bain could slash staff by as much as 4000, Mr Murphy has raised questions at a sensitive time for the airline, when its workers are under pressure and two key Virgin unions are already concerned about its bid, publicly backing Bain rival Cyrus.

Bain Capital’s statement after the deal was done said it was “committed to protecting as many Virgin Australia jobs as possible” but Mr Murphy had made it clear in earlier interviews that Bain was planning to return Virgin to its old lower-cost Virgin Blue days.

The key Transport Workers Union said on Friday that it “looked forward to working with Bain” as the airline’s new owner.

TWU national secretary Michael Kaine said Bain had “put forward a solid bid to secure the administrator’s recommenda­tion.”

“We are happy to work with them on the plan for getting the airline back on its feet.”

But he said there were “still many uncertainties” facing the airline which would “make decision-making very difficult”.

Mr Kaine called on the federal government to work with Bain and the trade unions to “develop a plan to secure the long-term survival of the airline”.

Bain is expected to move as early as next week to start working alongside Virgin’s chief executive Paul Scurrah, who will continue to lead the airline under the Bain ownership, at least for the immediate future.

Virgin Australia CEO Paul Scurrah and administrator Vaughan Strawbridge of Deloitte. Picture: John Feder

The airline’s liabilities have increased as a result of a deal done by Mr Strawbridge with the Australian Taxation Office to suspend payments of pay-as-you-go tax liabilities until the airline has been formally taken over by Bain, a move which will not happen until September.

Mr Strawbridge confirmed on Friday in an interview with The Australian that part of the deal was Bain providing critical funding to help the airline continue to operate during the period from July 1 to when it legally takes over the airline.

Announcing the deal on Friday, Mr Strawbridge said Bain had “presented a strong and compelling bid for the business” which would secure the future of Virgin and thousands of employees and their families.

He said the deal with Bain was a “very positive outcome” which had been achieved in just over eight weeks, despite the COVID-19-induced market conditions.

The deal will mean Virgin’s shareholders will not get any return from their investments, with the bond holders only expected to see a fraction of their investment returned.

Mr Strawbridge said it was “not possible to determine the estimated return to creditors” at the moment.

The proposal still needs to be considered by a meeting of creditors sometime in late August.

A weary Mr Strawbridge, who has barely slept in the past few days while finalising the deal, said he was pleased with the outcome.

But Mr Murphy’s comments have confirmed some of the worst fears of Virgin unions that the private equity bidder will be taking a hard-line view of its staffing requirements.

Virgin Australia chief executive Paul Scurrah described the tie-up with Bain as a “great deal” for the carrier.

Mr Scurrah said the airline was a step closer to relaunch as a result of the agreement with Bain.

He said he would now be working closely with the US private equity bidder on its vision for the business.

“Bain Capital spent many hours over the past weeks speaking to us and getting a deep understanding of our business and working to secure a deal with our administrators,” he said.

“We know they are committed to investing in the airline and we are thrilled to be working with them into the future.”

He said it was always the goal to bring Virgin Australia out of administration as quickly as possible and in a stronger financial position.

“This announcement brings us a step closer to that,” he said.

“Bain’s investment will cement our future as a major Australian carrier, secure thousands of direct and indirect jobs and ensure we can continue to bring competition to millions of customers for many years to come.”

The Bain deal will see the airline retain the Virgin brand.

Britain-based Virgin Group chief executive Josh Bayliss said he was pleased that Deloitte had run such an effective process to support the recapitalisation of Virgin Australia.

“We have been in discussions with Deloitte throughout the process and believe the investment envisaged by the administrators and Bain is a positive outcome for the company, its creditors and its employees,” he said.

“Time is now of the utmost importance and we cannot afford delay in getting the company back in the air for the benefit of its customers, its employees and the wider Australian economy.”