Virgin Australia eyeing debt restructuring deal

A large portion of the debt is with aircraft lenders and secured by aircraft. Picture: AAP

Virgin Australia’s proposed restructuring plan is understood to have considered a convertible note provided by the federal government that will convert to equity if the airline breaches its debt covenant.

Any deal – which has yet to be finalised with talks ongoing – comes as the airline remains in a trading halt pending an announcement.

Terms of the deal were said to be announced by Wednesday evening and it is understood to involve both lenders and equity holders taking a haircut if the covenants are breached.

It is believed that whether the restructure takes the form of a Creditor’s Scheme of Arrangement or a deed of company arrangement is to be finalised.

Should the plan for a government loan gain approval, Virgin will receive funding worth about $1.4bn from the government in total, including the money collectively made available to the airline industry. However any bailout hopes by Virgin could be cut short amid strong resistance in Canberra to supporting any specific company through the coronavirus crisis over an industry-wide solution.

Working on the plan is restructuring firm Houlihan Lokey while Virgin Australia’s long-time adviser is UBS.

Some say that a DOCA can be preferable because it removes all unwanted liabilities and requires all parties to follow it through, where as a creditor’s scheme involves a vote by lenders.

Involved in the debt restructure would be banks, US bondholders owed $US425m and Australian bond holders owed $325m.

Virgin Australia’s shareholders include Singapore Airlines, Etihad, Nanshan and HNA which all own about 20 per cent and Richard Branson, which has about 10 per cent. The remaining stake is listed on the Australian Securities Exchange.

It comes as it was revealed by The Australian on March 31 that Virgin Australia had approached the federal government for a loan worth $1.4bn.

Virgin Australia is buckling under adjusted net debt of $5bn when its market value is only about $700m and it posted an $88.6m half-year loss.

A large portion of the debt is with aircraft lease providers and secured by aircraft.

Virgin’s Australian bonds have been trading between $30 and $40 only months after investors took up the offer.

Investment bank UBS assisted Virgin Australia last year on its bond raising, which secured $325m to help pay for its $700m acquisition of the remaining 35 per cent stake in the Velocity frequent-flyer program that it did not own.

The bonds were sold at $100 each and have been trading at between $30 and $40.

Last month, Virgin suspended all international flights until June and halved its domestic capacity in response to travel restrictions imposed to stop the spread of coronavirus. On 9 April, Virgin Australia announced it would axe all but one domestic passenger route as it fights for survival in the ongoing coronavirus crisis.

The drastic reductions have meant at least 53 aircraft have been grounded across the Virgin and Tigerair fleet, and surplus staff managed with paid or unpaid leave, and in some cases redundancies.