Moody’s rating review a blow to Virgin Australia

Ratings agency Moody’s has put Virgin Australia’s credit rating under review for a downgrade.

Virgin does not have an investment grade credit rating from either Moody’s or Standard & Poor’s.

Virgin Australia’s credibility has taken another battering after ­ratings agency Moody’s put the airline’s credit rating under review for a downgrade because of continued uncertainties surrounding its financial future.

The credit rating review comes five days after Standard & Poor’s, the world’s largest ratings agency, downgraded its outlook for Virgin from stable to negative as Air New Zealand prepares to exit the airline’s share registry.

Moody’s vice-president and senior analyst Ian Chitterer said the review of Virgin’s credit rating reflected the agency’s concerns about the airline’s capital structure review and its level of shareholder support.

“The review also reflects the slower-than-expected momentum now evident in the deleveraging of the business and the deterioration in its liquidity profile,” Mr Chitterer said.

Virgin does not have an investment grade credit rating from ­either agency. Virgin was initially rated B2 by Moody’s in November 2014 but has not reduced its debt/EBITDA (earnings before interest, tax, depreciation and amortisation) as quickly as the agency had hoped.

Adjusted debt/EBITDA for the 12 months to December 31 was 7.2 times, a level that exceeded Moody’s tolerance of 6.5 times for its B2 corporate family rating, the agency said.

The airline’s unrestricted cash balance has also fallen by 24 per cent to $544 million at December 31, compared with $719m at June 30, which has hurt the company’s liquidity and credit profiles.

Virgin is in the midst of a capital review to focus on how it can find new sources of funding to continue growing after an intense period of investment to transform its business to battle Qantas’s dominance of the corporate and business markets.

Moody’s said that should the outcome of the capital review bring Virgin’s metrics into line with expectations for a B2 rating, Moody’s would affirm the current rating. If not, the airline would be downgraded to B3.

“In order for the rating agency to consider an upgrade to B1, Moody’s would need to see strong shareholder support, operational initiatives to enhance cash flow and profitability, and debt reduction to a level well inside the thresholds for a B1 rating. The rating agency views this scenario as unlikely,” Mr Chitterer said.

Air NZ shocked the market last week when it revealed it had brought on First NZ Capital and Credit Suisse to manage a review of its 25.9 per cent stake in the Australian airline that could see it sell its 914 million shares in the company.

The announcement — which triggered the immediate resignation of Air NZ chief Christopher Luxon from the Virgin board — came just a week after Virgin Australia had secured a $425m loan to keep its business humming while it undertook its capital review.

The probable exit of Air NZ from Virgin’s share register has met with nonchalance by many industry analysts who agreed that the Kiwi flag carrier’s reluctance to be a minority shareholder made sense. “There’s no doubt that Air New Zealand is doing a lot of soul searching as to what return shareholders will get from any possible capital raising,” Citi analyst Anthony Moulder said.

“It’s quite clear that Air New Zealand is saying it would rather spend money on its own business.”