Virgin Australia’s administrator Deloitte takes fresh swipe at airline’s bondholders

Administrator had to take loans to pay Virgin employees’ wages because the airline had no cash available.

Virgin Australia came perilously close to total collpase, administrators say. Picture: NCA NewsWire / Jeremy Piper

Virgin Australia’s administrator Deloitte has taken a fresh swipe at the airline’s bondholders over an alleged lack of funding for their proposed recapitalisation plans, while revealing Virgin would have collapsed without the government’s move to subsidise domestic flights during the COVID-19 pandemic.

In a letter sent late last week to Virgin’s Committee of Inspection, which is made up of 35 creditors and their representatives, Deloitte partner Vaughan Strawbridge also revealed he had to source loans to pay employees’ wages in the first week of the administration because the airline had no cash available and was burning $200m per month.

That has since been reduced by Deloitte and Virgin management through the administration process. Qantas last month revealed its cash burn had been reduced to $160m a month.

“We negotiated the release of funds (restricted cash) that had been withheld by financial institutions who were seeking to offset funds held against debts owed to them, or exposures they had to the companies. Since that time we have been able to access more of the restricted cash, which has enabled us to trade the business while we urgently sought a sale and/or recapitalisation of the business,’’ he told the committee in the letter, obtained by The Australian.

The letter was sent before last Thursday’s most recent Committee of Inspection meeting, which endorsed the sale process undertaken by Deloitte. “Given the group‘s cash constraints, achieving a sale and/or recapitalisation of the business within an expedited timeframe was critical.

“Without the government-underwritten flights we would have been forced to cease trading the business due to the increased level of trading losses that would have been sustained,’’ Mr Strawbridge added.

Bondholders owed billions of dollars by Virgin believe they can derail the sale of the airline to Bain Capital with a “superior proposal” at next month’s creditors’ meeting.

Singapore’s Broad Peak Investment Advisers and Hong Kong’s Tor Investment Management (BP&T) together hold $300m in unsecured notes issued by Virgin Australia.

They are among 30 institutional bondholders and 6000 mum and dad investors owed a total of $2bn.

On Friday in the Federal Court the bondholders failed in their bid to gain access to confidential details of the sale agreement signed with Bain, but were granted the opportunity to present a rival recapitalisation plan for the airline to the administrator, to be put to the creditors’ meeting.

Tearout of letter from Virgin Australia administrator Vaughan Strawbridge to creditors.

At the hearing the court also put the administrators on notice to provide as much information as possible in the remainder of the process, beyond “commercially sensitive” material.

Earlier in the week the bondholders had made a surprise move to appeal to the Takeovers Panel to challenge the Bain deal, which they have now withdrawn following Friday’s court hearing.

In his letter to the Committee of Inspection, Mr Strawbridge outlined concerns with the funding arrangements for the bondholders’ plan to recapitalise the business by a debt for equity swap and a capital injection.

Their initial proposal reportedly offered $125m in interim funding and an $800m capital injection into the airline.

“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,” he wrote.

“The business does not have sufficient cash to continue trading without immediate funding.

“It is our understanding 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.”

He claimed the bondholders’ proposal did not deliver any certainty or guaranteed return to creditors, nor did their proposal provide any cash for a dividend to be paid to unsecured creditors.

“At no time has BP&T provided any evidence of funding (either for interim funding or to support their recapitalisation proposal). On Tuesday 23 June 2020 BP&T confirmed to the administrators that they did not have investment committee approval from their organisations for the provision of interim funding,’’ he wrote.

A spokesperson for the bondholders group declined to comment except to say that Mr Strawbridge’s letter did not accurately describe the bondholder proposal of June 24, 2020.

The letter also confirmed details of Bain’s plan to pay $450m in employee entitlements and pay for another $604m in travel credits. The private equity group is also understood to have ­offered to inject $600m cash into the airline and $125m to provide funding through to the creditors’ meeting.

The letter also updated numbers in Deloitte’s first report to creditors, noting Virgin now had 10,247 known creditors (including approximately 9,020 employees), not including customers entitled to credits for flights which were cancelled due to the pandemic.

Secured lenders and aircraft financiers are owed approximately $2.284bn, while aircraft lessors are owed around $1.884bn, representing the full value of future claims if their losses are not mitigated.

Landlords, including the nation’s major airports, are owed around $71m.