Bondholder challenge to Virgin deal needs to commit cash

Virgin Australia aircraft lessors are owed $1.9bn. Picture: AFP

Administrator Vaughan Strawbridge has laid out the perilous financial state of Virgin Australia, warning that bondholder activist Broad Peak has declined to provide any details of its funding plans in its expression of interest lodged before the Bain deal.

Bondholders Broad Peak Investment Advisers and Tor Investment Management have launched a bid to derail the sale of Virgin to Bain Capital, seeking through the Federal Court to have their alternative proposal considered by the airline’s administrators and put to creditors for a vote. The application is due to be heard next week.

Administrators Deloitte and Bain have both said the sale agreement does not allow other proposals to be considered or put to creditors.

In a letter this week to the creditors committee of inspection, Deloitte’s Strawbridge concluded: “We want to emphasise the gravity of the decision, which we as administrators had to make, not only in respect to exercising the power of sale under 437A of the Corporations Act for the sale of the business, but whether we could ensure the companies continued trading.”

The administrators’ agreement with Bain included $125 million of interim funding and $750 million as a deed of security.

Broad Peak, one of the bondholder group, had lodged an expression of interest on May 31 ahead of the June 2 decision to shortlist Cyrus Capital Partners and Bain, and the eventual sale deal with Bain on June 26.

Strawbridge’s letter sets out the administrators’ argument for rejecting the bondholders’ plan. “As you are aware, the administrators have exercised our power of sale pursuant to section 437A of the Corporations Act and as such we are unable to consider competing proposals for the sale of the assets or otherwise dealing with them in any manner whatsoever.

“This remains the position unless the asset sale to Bain Capital is set aside by the court.

“Currently, neither BP&T (Broad Peak and Tor) nor any other party, have brought an application to the court seeking to set aside the asset sale to Bain Capital.”

Federal Court judge Justice John Middleton will next week consider the latest bondholder challenge, which is clearly designed to attempt to get more money for the bondholders.

It would be a surprise if Justice Middleton accepted the challenge.

He has already ruled that an alternate deed of company arrangement (DOCA) may be put to the October 6 creditors’ meeting, but in reality the meeting can only approve one DOCA.

Administrator Vaughan Strawbridge, right, Virgin Australia CEO Paul Scurrah. Picture: John Feder

If the Bain deal is rejected then the company faces liquidation, which is not likely to provide any returns to the unsecured bondholders.

The company has 10,247 creditors, including its 9020 staff.

Secured lenders are owed $2.3bn, the bondholders $1.9bn, trade creditors $167m, aircraft lessors $1.9bn, landlords $71m, staff $451m and customer credits $604m.

The commitment provided by Bain included covering employee entitlements in the event of a liquidation of $450m, travel credits $604m, a loan from the Velocity frequent flyer company of $150m and other costs.

Broad Peak knows the extent of the liabilities.

In his letter to the creditors, Strawbridge explained why he did the deal with Bain.

“Exclusivity provisions formed part of the binding sale agreements with Bain Capital, which is normal practice for such transactions,” he said.

“These provisions prevent us from considering or progressing discussions with respect

to the sale or dealing with the assets subject to the agreement with any other party.

“We do not see how a competing DOCA that deals with the assets of the business that are

subject to the agreement with Bain Capital can be put to the creditors of the companies,” he added.

Strawbridge said the benefits of completing the sale via the Bain DOCA included that it “will provide a much greater return to unsecured creditors; and the completion of the sale can happen much quicker, than if the sale is completed under an asset sale agreement”.

He noted he had told Broad Peak “that we required an interim funding facility to be provided of $125m and collateral to underpin a proposal of $600m. We indicated that if these threshold requirements could be met, we would consider their proposal further”.

“BP&T advised they would not provide interim funding unless their proposal was accepted, and they were not.”

Given Broad Peak is unwilling to commit to a rival offer, its game now seems just to get a higher farewell payment.

Strawbridge noted Broad Peak had submitted an intention to offer on May 31. “The proposal sought to recapitalise the business by way of a debt for equity swap along with a capital injection. We considered the proposal but could not take it forward due to its highly conditional nature, lack of certainty and no evidence of committed funding.”

Strawbridge said Virgin “did not have sufficient cash to continue trading without immediate funding”.

“It is our understanding (of the Broad Peak offer) that the significant capital injection required to fund the businesses and to pay any entitlements for staff who would unfortunately be made redundant through the process, would be funded from new funds raised from bondholders. We saw no evidence of any funds unconditionally committed for this purpose.”

The bottom line says any next step from the bondholders needs to come with a big pile of cash or all creditors, including the unsecured bondholders, will be worse off.