Virgin Australia investors in limbo

As Turnbull showed in 1991, a corporate auction process is a tough one where nice guys risk finishing last. Picture: AAP

Back in 1991 an aggressive young investment banker called Malcolm Turnbull boldly inserted himself into the biggest takeover deal in Australia at the time.

Three parties were vying for Fairfax newspapers, which had collapsed into receivership in late 1990 with a mountain of debt incurred as a result of a move by “young” Warwick Fairfax to privatise the family media company.

Fairfax had big loans from the banks, mainly ANZ and Citibank, but along the way had raised another $450m in unsecured “junk bond” debt from a group of US investors. Hard-charging investment banker Mark Burrows, who was in charge of the process, had strictly forbidden the three bidders from negotiating with the junk bondholders.

Most people dismissed them as a group of low-ranking investors that had no chance of getting their money back.

Undeterred, the 37-year-old Turnbull jumped on a plane to Los Angles, met up with the US bondholders, and signed them up to an exclusive negotiating agreement.

Turnbull approached one bidder, Irishman Tony O’Reilly, who had an Australian-born wife, to try to team up with his bondholders.

O’Reilly, as Turnbull recalls in his book, A Bigger Picture, was dissuaded from talking with Turnbull and the bondholders by Burrows on the basis the bondholders “had no leverage”.

He then teamed up with rival bidder, Canadian Conrad Black, who was involved in the Tourang consortium with Kerry Packer.

Tourang eventually won the auction, its links with the bondholders making a critical difference to sealing the deal.

The high price paid for the company saw Turnbull, as he recalls, secure a much higher price for the bondholders, whose claim many had written off as being worthless — about 30 cents in the dollar or more if they accepted Fairfax shares.

Fast forward to today, and a much less organised gaggle of creditors, with a total exposure of almost $7bn, are trying to get the best deal they can in Virgin’s sale process being handled by Del­oitte’s Vaughan Strawbridge, who has been in charge of the airline since it went into administration on April 21.

Just how well they will do remains to be seen, particularly with Strawbridge having to juggle an array of “stakeholders”, including very active and vocal unions wanting the best deal for Virgin’s 9000 employees, airports and aircraft lessors owed money as well as state governments of NSW and Queensland.

Low profile

For their part the bondholders, which range from 30 big institutional investors to more than 5000 small noteholders, including many mum-and-dad retiree investors, are taking a studiously low profile. They are among some unsecured creditors owed $2bn who rank the lowest in the creditor food chain now hoping for a partial meal.

As Steve Wright, a director of stockbrokers Morgans, told the Australian, a large number of those small investors came onto the books with Virgin’s $325m note raising last November, which was designed to raise funds for Virgin’s $700m deal to buy out the other 35 per cent of its Velocity Frequent Flyer business from Affinity, which ended up being bought out at a figure three times the amount it bought into.

There were plenty of financial intermediaries only too happy to offer the notes to their clients.

The note issue was arranged by UBS, supported by joint lead managers Morgan Stanley, Morgans, Ord Minnett and UBS, with co-managers including Bell Potter, Crestone Wealth and Escala ­Partners.

As Wright, whose firm Morgans was a manager of the issue, said, it was the story of Virgin’s new chief executive Paul Scurrah’s plans for the company that won the support of mum-and-dad investors, many of whom were based in Virgin’s home state of Queensland.

Represented by corporate advisers Faraday Associates, the bondholders have so far played Strawbridge’s game, being good girls and boys, and have not spoken publicly about what they hope to get out of the process.

What will bidders offer?

At this point it is not known exactly what deal each bidder will offer.

Representatives of the bondholders are expected to meet with representatives of the two bidders — Bain Capital and New York hedge fund Cyrus Capital — within the next week.

Time is ticking down as the bidders now have less than two weeks to make a final binding bid to Strawbridge, who will pick his “preferred bidder” by the end of June — a tight timetable designed to reduce the time that Virgin’s solvency is on Strawbridge’s shoulders.

The creditors get to have their say at a meeting on August 22.

But the problem for them is by that time Strawbridge will already have picked his preferred bidder, putting a take-it-or-leave-it deal to creditors who can vote on it. As one retail investor said on Tuesday, by the time they get to that point, the creditors can hardly reject the deal as that may put the airline into insolvency and they could lose all of their money.

The process is being handled behind closed doors, with many small investors having no idea what is happening or if they are about to lose what could be their life savings.

It is not quite in jest that one suggests the unsecured creditors themselves need a hard-charging negotiator like Turnbull who can get the best of a bad deal for them and their $2bn.

As Turnbull showed in 1991, an aggressive defender of the unsecured creditors can make a difference to limiting the amount of money they lose.

The mum-and-dad investors in Virgin need to get their voice out there, and soon, to put pressure on Strawbridge to get the best deal he can for them.

Time is ticking down fast.

As Turnbull showed in 1991, a corporate auction process is a tough one where nice guys risk finishing last.