Virgin’s credit rating downgraded as it awaits news of support

Virgin Australia’s listed bonds on Tuesday afternoon were trading at $38

Virgin Australia is understood to be working closely with legal experts from law firm Clayton Utz, as the airline industry awaits news as to whether it will receive government support.

Virgin Australia on Tuesday told the market that ratings agency S&P Global had downgraded the airline’s credit rating to B- on deteriorating domestic market conditions and placed it on credit watch negative.

The airline’s shares are now at 6c and its market value is $583m.

The company said it counted Clayton Utz as its long-term legal advisers.

On Friday, Virgin Australia told the market it would reduce capacity by 6 per cent for the second half of the financial year and cut costs, with rival Qantas telling the market that it would cut 90 per cent of international flights and 60 per cent of domestic capacity until the end of May due to the coronavirus pandemic.

While Virgin Australia is yet to call in any restructuring experts, many believe it faces an uphill battle in the coming months and may ultimately wind up subject to a bailout by its major shareholders, including Singapore Airlines, if the government doesn’t provide assistance. The level of government involvement is also a critical question for Qantas, which may need to resort to an emergency equity raising.

Qantas has a market value of $4.5bn, with the group’s shares dropping from around $7.40 at the start of the year to $2.86 on Tuesday.

At its half-year results, Qantas said it had net debt of $5.3bn. It said it had $1.9bn in cash on hand — $1bn in an untapped debt facility and another $4.9bn in assets unencumbered by debt.

Equity capital markets specialists say that securing investor support for an equity raising revolves around selling the deal as one that would result in the airline returning to a strong performance when the coronavirus concerns ease.

Virgin Australia’s listed bonds on Tuesday afternoon were trading at $38, after investors paid $100 each for the bonds last year.

The carrier is buckling under adjusted net debt of $5bn and for the half year it posted an $88.6m loss.

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