Virgin Australia’s credibility takes a dive on S&P downgrade

Virgin Australia’s financial credibility has been dealt a serious blow after Standard & Poor’s downgraded its outlook.

The scene is set for a takeover battle between Virgin shareholders Etihad and Singapore Airlines.

Virgin Australia’s financial credibility has been dealt a serious blow by Standard & Poor’s after the world’s largest ratings agency downgraded its outlook on the airline on the back of Air New Zealand’s probable exit from its share registry.

Uncertainties over the ownership of Virgin, as well as the funding future of the airline, prompted S&P to downgrade the nation’s No 2 carrier from “stable” to “negative” yesterday.

The ratings house also revised its assessment of Virgin’s liquidity profile to “less than adequate”.

“The outlook revision to negative reflects a degree of uncertainty over Virgin Australia’s near-term funding requirements and future ownership structure,” S&P analyst Graeme Ferguson said. “While we view Virgin Australia’s operating performance to be fundamentally sound, we expect adverse currency and working capital movements, as well as increased capital expenditure relative to our previous base-case forecast, to affect the airline’s current debt and liquidity levels.

“This may require a sizeable new funding commitment over the next 12 months.”

S&P has maintained Virgin’s ‘B+’ overall corporate credit rating, saying it did not believe there had been a fundamental deterioration in the airline’s operating performance. “The ‘B+’ corporate credit rating on Virgin Australia is contingent on ongoing, timely, and co-ordinated shareholder support,” Mr Ferguson said. “We could lower the rating, if we assess shareholder support to have diminished, or if the group fails to strengthen its liquidity position over the next three-to-six months.

“In our opinion, without ongoing and timely shareholder support, Virgin Australia would not be able to absorb low-­probability adverse events, even after factoring in capital spending cuts, asset sales, and cuts in shareholder distributions.”

The downgrade came as analysts said Singapore Airlines was the likeliest buyer of Air New Zealand’s $325 million stake in Virgin.

Air NZ shocked the market on Wednesday when it revealed it had brought in First NZ Capital and Credit Suisse to manage a ­review of its 25.9 per cent stake in the Australian airline, which 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 had secured a $425m loan to keep its business humming while it undertook a wide-ranging review of its capital structure.

The potential selldown of Air NZ’s stake has now set the scene for a takeover battle between Virgin’s other major shareholders in Etihad, which owns a 24.2 per cent stake, and Singapore Airlines, with a 22.8 per cent stake.

But veteran aviation analyst and Centre for Asia Pacific Aviation boss Peter Harbison said it was Singapore that had more to lose by letting competing Asian airlines swoop on Air NZ’s holding and take a foothold in the ­Australian market. “This is a wonderful opportunity for Singapore Airlines to buy in, especially with the dual ownership structure Virgin Australia now has. And really, they should be desperate to buy it, probably up to 100 per cent for the domestic airline,” Mr Harbison told The Australian.

“It would also, with the international ownership structure, allow them to operate to the US, something they have long aspired to. Etihad does not have such a pressing need to buy, but inevitably James Hogan would be very keen to buy in, not just to ensure the feed, but also because of his Australian connection.

“The big thing is who wants Virgin Australia badly enough and who will pay the most.”