Macquarie Group in Virgin Australia restructure mix

It is possible Macquarie’s involvement in a Virgin Australia restructure is to protect its existing interests Picture: Bloomberg

Macquarie Group could be positioning itself to work with a consortium on a potential recapitalisation of Virgin Australia, thought to involve a private equity firm and an airline.

It is considered a possibility that Macquarie’s involvement is to protect its existing interests, given that Virgin has about $2bn owing to aircraft lease providers, and the bank is one of the major financiers in this space.

Another scenario is one in which Macquarie brings together several institutional investors, with the proposal involving the bank itself only injecting a limited amount of equity.

Wesfarmers and BGH Capital are both thought to have an interest in Virgin Australia following its collapse, while former Macquarie boss Nicholas Moore is working for the government.

Australian private equity firm BGH Capital is founded and run by former Macquarie investment banking boss Robin Bishop and former TPG Australia boss Ben Gray and TPG executive Simon Harle.

Mr Bishop is known to have had close ties with Wesfarmers during his past banking days, while Mr Gray worked with Macquarie in 2007 on an attempted buyout of Qantas while he was at TPG Capital.

While it is unclear if Wesfarmers, Macquarie and BGH are working in concert, many believe it would be logical.

It is also unclear what airline is looking at Virgin, and whether it is working with BGH Capital or another buyout fund.

Sources say various parties remain in talks with each other and the situation continues to be fluid.

Market experts believe that Singapore Airlines, Etihad and Air New Zealand have the most to gain from embarking on a deal involving Virgin Australia because of the opportunity to boost traffic on their existing networks. But most say Air New Zealand is unlikely to be a contender.

Wesfarmers is expected to be extremely keen to obtain control of the Velocity frequent-flyer business, which may provide the impetus to help recapitalise Virgin Australia.

Wesfarmers has its own loyalty program, Flybuys, valid for its Target and Kmart stores and Coles supermarkets. Bringing both businesses together would create a loyalty program more valuable than Qantas’s program.

Velocity has about 10 million members and Flybuys more than 10 million, while the Qantas loyalty program has 13.2 million.

Virgin Australia entered voluntary administration on Tuesday, owing about $5bn in debt, with Deloitte appointed.

Of the debt pile, about $1bn is secured debt owed to banks, about $2bn is secured against aircraft leases, while the remainder is owed to unsecured bondholders based in Australia and the US.

While more than 10 parties are said to have expressed interest in Virgin Australia, it is thought that one or two consortiums are likely to be in serious contention, and an outcome in which some government assistance could be involved may evolve within weeks.

Other private equity firm names that have emerged around the situation are Oaktree and Apollo.

Some question whether a transaction makes sense for private equity on its own, given that airlines are typically highly capital-intensive businesses, limited on the cash flow that buyout funds are so attracted to.

Others add that governments are unlikely to offer financial backing on a recapitalisation that involves a private equity firm driving down costs and selling a recut Virgin Australia for a major profit in about five years.

Airlines around the world are reeling, with United Airlines in the US this week raising about $US1bn ($1.6bn) of equity through investment bank Citi.

Canny investor Warren Buffett has also been selling airline stocks since the onset of the coronavirus.