Virgin bond holders on the front foot in Virgin dogfight

Illustration: John Spooner

Virgin’s unsecured bond holders have about $11 trillion under management between them, and figure in this battle they are serving at 30-love in the game. It’s a bold claim from a group written off from day one, along with the shareholders, as having zero chance of getting more than a few cents in the dollar for their $2bn in unsecured debt.

Instead, the bondholders claim they are $2bn ahead because they don’t have to pay themselves anything to get their approval.

Under section 444GA of the Corporations Law they can swap their debt for equity and back management into the game as the new shareholders.

How much better would that look: to have 6000 Australian small shareholders and 30 world-class institutions backing the airline in the real battle against the monopolistic Qantas.

That is the pitch the bond holders have put to the government and others as they line up for next Monday’s deadline.

They are battling Bain and Cyrus, who have been working for weeks with administrator Vaughan Strawbridge on a recapitalisation of the airline.

Virgin has $7.1bn in debt, of which $2.1bn is accounted for by the bond holders. The airline is replete with dud contracts, with everyone from Boeing for the 737 planes to Gogo for the Wi-Fi to Gate Gourmet for the tucker and the staff with expensive EBAs.

The bond holders figure Strawbridge and management can use the next month in administration to work through the contracts, before August 22 when the creditors’ vote is due.

Cyrus has $US4bn under management, Bain $25bn in its pockets and the bond holders $11 trillion, so go figure which one can pull this off.

That’s the pitch from the bond holders, who have kept a low profile while the others have talked up their claims, but it’s an outside chance at this stage. They have one big advantage in the fact they don’t have to pay themselves, but Strawbridge has to weigh this against the other bids on the table.

The bond holders are being advised by Faraday Associates, led by debt guru Lachlan Edwards and former Freehills lawyer John Nestel, with legal advice from Corrs Chambers Westgarth.

Painting a picture

Dulux boss Patrick Houlihan claims COVID-19 has been a wake-up call about the benefits of local manufacturing, highlighting the advantages of reliable supply to customers.

Mike Schneider at Bunnings, who accounts for around 25 per cent of Houlihan’s paint sales, is quick to praise the efforts of Dulux, other suppliers and his 46,000 staff for the way all of the above handled the lockdown.

This weekend Bunnings New Zealand is starting the famed charity sausage sizzle, so life is getting back to normal. And Schneider is looking forward to opening them in Australia on a market by market basis.

Bunnings was one of the clear winners of the lockdown, with parent Wesfarmers disclosing sales in the first 11 months of the financial year were up 11.3 per cent against 5.8 per cent in the first half.

Just how much of the sales were a pull-forward from later in the year remains to be seen, but Schneider is convinced his team’s flexibility helped bring in the customers.

An earlier decision to boost online sales helped, with click-and-collect well established but tailored for the circumstances.

There was also a DIY hotline for the over 70s to get special assistance when they arrived at the store and project Bunndles (sic), which are complete kits for small do-it-yourself projects around the home.

While there is plenty of talk about online it is less than 2 per cent of sales, and overseas experience suggests it will be a slow climb up to 10 per cent.

The Dulux mantra is “imagine a better place” and Schneider figures many people sitting around home in the lockdown looked around and found jobs to do.

That helped sales, but now people have other things to do with their money Bunnings has more competition, which will see a slowdown unless consumers really have changed.

As the lockdown continued some were wary about having tradespeople in the house for fear of catching the virus but now they are getting more comfortable about intruders.

The now Nippon-controlled Dulux earns 75 per cent of its profits and 60 per cent of sales from paint. The rest is being grown through the wider sales network which means Selleys, Yates and other products are growing in Asia.

Around 35 per cent of goods (not including nursery) are made in Australia and the rest is imported, which thankfully has been maintained through the lockdown.

The way Houlihan sees it, the value of local production was shown through the lockdown and he wants the government to ensure value-added production is boosted.

This means proposed changes to the R&D rules should be scrapped because they are based on the percentage of operating costs, which favours companies with overseas production.

If your costs are $100 and you compete with someone with just $50 in costs and you both spend $10 on R&D, then the competitor will be more R&D intensive and hence get better tax benefits.

The present system is more volume-based at 8.5 per cent of investment or a bit over half the 15 per cent on offer in New Zealand.

With 100 chemists and 140 scientists, Dulux’s Houlihan figures he is doing his bit for the R&D effort and local manufacturers should be supported.

Class action reaction

Yarra Capital’s Dion Hershan has come out swinging, backing directors in the fight against class actions in a submission to the parliamentary inquiry on the issue, declaring it “is a regime that has paved the way for enterprising litigation funders to flourish without necessarily achieving the ultimate objectives of attaining fair and equitable outcomes for plaintiffs, and one that has resulted in rising costs, diminished shareholder returns, and inefficient capital markets”.

“We note data from industry participant Marsh which shows that, between 2011 and 2018, companies in the ASX 200 typically saw the cost of their D&O insurance increase by over 250 per cent. Further, Marsh believes that the average increase in premium for the ASX 200 in 2019 was 118 per cent. Although it attracts very little attention, all shareholders carry this burden, since surging insurance premiums are dilutive to earnings and dividends (and harm) the efficient operation of capital markets.”

Hershan said: “The grave reputational consequences at a company and individual level has resulted in Australian companies being generally reluctant to make information available.”

He wants the laws changed back to pre-2001 levels when Joe Hockey presided over an effective relaxation of the rules, creating a strict liability rule and removing the requirement that disclosure breaches need to be “reckless, negligent or with knowledge”.

That is how the government’s temporary rules are framed and Hershan wants class action plaintiffs to be required to demonstrate some level of intent or fault and give companies and directors better defences.