Bain’s offer price for Virgin revealed, bondholders to get up to 13c

A report sets out Virgin Australia’s eye-watering sale price and shows unsecured creditors can expect only up to 13c in the dollar.

Bain Australia CEO Mike Murphy who has led the bid for Virgin Australia. Picture: John Feder

US private equity firm Bain Capital will pay $3.5bn for Virgin Australia, in a deal that will cover employees’ entitlements but leave bondholders significantly out of pocket.

Administrators Deloitte revealed the figures following the release of their report to creditors ahead of the second creditors meeting on September 4.

Virgin Australia went into administration on April 21 with debts of $6.8bn.

While secured creditors and employees will be paid in full what is owed to them, unsecured creditors such as bondholders can expect between 9 and 13 cents in the dollar for their $2bn investment.

The return will fall even lower, to between 4 and 7 cents in the dollar, if Bain’s deed of company arrangement is not voted up at the creditors meeting.

A bondholders’ spokesman said the disappointing return was “not a surprise”.

“Given the rushed sale process, for some time we have feared this outcome was inevitable,” he said.

“We have always maintained the hurried sale of an airline at the height of a global pandemic was a flawed approach.”

Deloitte senior administrator Vaughan Strawbridge said the outcome of the process had “secured a future for the Virgin Australia business”.

“We have set out our opinion to creditors that it is in their interest to approve the deed of company arrangement proposed by Bain as it provides for the best return to creditors in what are extraordinary circumstances, and that were impossible to foresee,” Mr Strawbridge said.

“Importantly the Bain DOCA provides certainty of the continuation of Virgin as Australia’s second airline; employee entitlements in full; the continuation of a number of supply and finance arrangements; customer credit for flights taken forward; and a distribution to unsecured creditors of an estimated $462 million to $612 million.”

Virgin Australia administrator Vaughan Strawbridge. Picture: AAP

Under Bain’s ownership, Virgin Australia could offer certainty to its employees and customers, Mr Strawbridge said.

“It achieves all the objectives of the voluntary administration process that we sought from the outset. Now we just need to bring the airline out of administration as soon as possible,” he said.

The report highlighted Virgin Australia’s precarious financial position before COVID-19 hit and revealed that for the first four months of 2020, the airline had made a $763m loss.

The administrators’ view was that the airline’s balance sheet had been weakened from “cumulative losses almost year on year from 2009 to 2020 of approximately $2.2bn”.

“During this period, revenue had continued to grow however it was not profitable growth,” said the report.

“This period encompassed the change in the Virgin Group’s business from a budget to full-service airline. As evident by the year-on-year losses, the Virgin Group was unable to derive sustainable profits from this change in strategy.”

Despite the management group embarking on a new strategy to simplify the business and drive cost reduction under CEO Paul Scurrah, the process was only part way through when the COVID-19 crisis struck.

“We are therefore of the view that the Virgin Group’s financial difficulties were due to an already highly leveraged balance sheet, resulting from past years of losses, that was unable to support the business impact caused by COVID-19,” the report concluded.

According to the terms of the binding agreement with Bain, the private equity firm would face a $750m “penalty” if it walked away from the sale at this point.

The company has already stumped up $125m in interim funding for Virgin Australia and taken over financial responsibility for the airline.

If the deed of company arrangement is not supported by the creditors meeting, Bain will still become the outright owner of the airline, through an asset sale.

Under Bain, Virgin Australia is expected to remain a full service carrier with a workforce about two-thirds its current size, and a fleet of all Boeing 737s flying to regional and domestic centres.