Virgin credit rating descending into junk

Virgin Australia’s credit rating took a further hit on Friday, with Moody’s downgrading the airline’s corporate rating from B2 to B3.

Virgin Australia’s check in at Brisbane International Airport. Picture: Liam Kidston.

Virgin Australia’s credit rating took a further stride into junk territory on Friday, with Moody’s downgrading the airline’s corporate rating from B2 to B3, and its unsecured rating to a “currently vulnerable” Caa1.

A rating of Caa1 indicates a speculative investment carrying substantial credit risk.

The downgrade followed on from another disastrous week for travel demand as a result of the coronavirus crisis, prompting Virgin Australia to suspend all international flights from the end of the month and halve domestic services.

Moody’s “ratings rationale”, detailed by senior credit officer Ian Chitterer, said the sharp decline in demand came at a time when Virgin had “minimal headroom under its current rating”.

He said Moody’s expected Virgin’s debt to be seven times its revenue by the end of the 2020 financial year, which was above the downgrade trigger.

“Virgin is currently reducing costs as much as possible to manage its way through this very volatile market environment and mitigate some of the negative credit effect,” Mr Chitterer said.

“The company is working with staff and the unions and has requested staff to use annual leave or consider unpaid leave. Redundancies will be a last resort.”

Virgin Australia CEO Paul Scurrah has repeatedly denied the airline was in danger of going under in the current coronavirus crisis due to the strength of its balance sheet, with $1bn in the bank.

Moody’s acknowledged the airline had no new aircraft deliveries until July 2021, and no significant debt maturities until October 2021, but said significantly lower bookings would lead to material cash burn in the short term. “The pace and quantum of Virgin’s cost reductions will be a critical factor in reducing the cash burn and ensuring it has the liquidity to meet its obligations,” Mr Chitterer said.

Since the start of the coronavirus crisis in late January, Virgin Australia’s shares have dived from 14.5c each to 5.5c at Friday’s close.

Mr Chitterer said Moody’s could downgrade Virgin Australia further if domestic passenger volumes fell beyond current expectation “prompted by passenger fear, widespread infections, or domestic flight bans”.

“The outlook could be returned to stable if Virgin manages to reduce costs and capital spending to a level where its liquidity can be maintained above $700m, along with a stabilising domestic industry and recovering passenger demand,” he said.