Could Virgin bond holders get cut of future earnings?

There are 9000 Virgin Australia employees and more than 6000 bondholders, which makes them influential for the creditors vote on a Deed of Company Arrangement on August 21. Picture: Lyndon Mechielsen

The Virgin Australia bond holders owed about $2bn could be offered a cut of the airline’s future earnings by the suitors, say sources.

This could be as an alternative to offering cash as a payment and would likely be subject to certain performance hurdles.

Some of the bonds are not due to expire until about 2024.

Another option could be putting forward a payment through equity in the airline or cash and equity.

Advising the bondholders is Lachlan Edwards from Faraday Partners, who acted for Atlas Iron when it was recapitalised by its lenders in 2015.

As part of that deal, Atlas contractors McAleese Transport, Maca and Qube Logistics won the option of forgoing some of their payments in the short-term to ensure that the company did not collapse.

In return, the contractors shared in some of Atlas Iron’s upside when the iron ore price regained strength and its position improved.

Working on that deal was also Houlihan Lokey, the firm which is currently working on Virgin Australia with Morgan Stanley, and voluntary administrator Deloitte.

One scenario could be that the bondholders receive 10c in the dollar or less, and then be entitled to a certain amount of the Virgin Australia cash flow in future years, subject to certain performance hurdles.

The bond holders – considered a large and disparate group – have been planning their own alternative proposal to rescue Virgin Australia that involves swapping their $2bn of debt for equity.

But many consider this as a tactic to place pressure on the final two suitors for the airline – Bain Capital and Cyrus Capital Partners – to deal them into their offers.

It is understood that the bond holders have not sold down debt to any third party as of yet or sourced equity elsewhere, with the thinking being that they have their own access to funds.

The common thought is that any bid needs to involve the offering of cash of about $1bn to keep the airline afloat in the short term – either in the form of equity or additional debt.

How would it work?

Doubts remain about their efforts to make a bid work because the number of bondholders owed funds is so large.

However, the belief is that they hold enough sway to place pressure on Cyrus and Bain to offer them some form of compensation for their losses following the collapse of Virgin Australia with debts owing of close to $7bn in April.

It is understood that the bondholders were offering payment on spec to an adviser for assistance with Virgin when they went searching for a firm to represent their interests, prompting some to decline the opportunity.

The final two Virgin bidders have not ruled out a payment to the bondholders as part of their approaches.

But it is understood that they would not have received a payment as part of the proposal from BGH Capital and its backers, which were knocked out of the competition in the second round.

There are 9000 Virgin Australia employees and more than 6000 bondholders, which makes them influential for the creditors vote on a Deed of Company Arrangement on August 21.

For a deal to succeed, it needs to be supported by a majority of creditors in terms of dollar value and number.