Virgin signed, sealed and delivered despite bondholder pleas

The reality is Bain’s Mike Murphy has the keys to the airline’s assets and the deal is done.

Mike Murphy, Bain Australia CEO. Picture: John Feder/The Australian.

Amid the self-serving noise from Virgin bondholders, the reality is Bain’s Mike Murphy has the keys to the airline’s assets and the deal is done.

On June 26, administrator Vaughan Strawbridge signed an implementation agreement with Murphy that meant the deal would be done by either approval of the deed of company arrangement (DOCA) or by the sale of ­assets. In return, Murphy committed to injecting $125m to keep the company afloat — and that commitment was the swing factor in the $1.7bn deal.

Just how much creditors will get depends on how good Murphy’s team is in dealing with the creditors to redraw a string of dud contracts, from planes to the Wi-Fi to catering.

The creditors’ meeting scheduled for before the end of August is in practical terms a charade because the deal is done — unless, of course, the bondholders want to put a cheque for $50bn on the table.

Murphy has the keys and is in the house already, watching Collingwood on the television, while the bondholders are running around outside trying to get a peek at the score.

The running around screaming is, of course, also aimed at trying to convince Strawbridge and Murphy to give them more meat on the bone they will toss out the back door.

The only mistake Strawbridge has made is not telling us all about the deal now so everyone knows where they stand. He no doubt wants to look like he is playing by the rules of the game to avoid the risk of triggering a wildcard court to toss out his deal.

The bondholders tried to get the Federal Court to force Strawbridge to tell us all about the deal, but the court last week declined and said he could come clean when he deemed fit.

The court did give the bondholders the right to submit an alternate DOCA to the meeting, but unless they have agreement to have it voted on first and it is a winning bid, that is not such a great victory.

Justice John Middleton effectively gave the bondholders the right to do what they could do anyway.

There were other ways the company could have been sold, like the Arrium model, where administrators KordaMentha won approval from the creditors from day one to do what they could, which was to eventually sell the company to Sanjeev Gupta for $700m in 2017.

Once that deal was done, it went to creditors.

The insolvency game is a small world, and that deal featured Lachlan Edwards advising the ­directors and John Nestel at Herbert Smith Freehills advising the company and — now wearing different hats at Faraday — they are advising the Virgin bondholders.

Bain’s adviser, KordaMentha, is suing the board, trying to get hold of the directors’ and officers’ insurance money to get more returns for creditors.

The claim effectively alleges the board allowed the company to trade while insolvent and was dipping into existing lines of credit with a potential sale agreement at the table.

The Virgin battle is won and, barring a miracle, it’s the charade that continues until the creditors meeting is done. Then comes the tough part for Murphy: battling the behemoth in Qantas in a COVID-plagued economy.

ASIC fronts Senate

Australian banks will follow their US counterparts in lifting loan loss provisions, but the magnitude is so far smaller due in part to different loan books and the COVID-19 ­impact on the economy.

The macro effect of the pandemic and the role of the banks hardly featured in parliamentary scrutiny of ASIC on Wednesday.

It was more focused on individual scams and longstanding political issues around industry super funds, led by senator Andrew Bragg, whose day job before entering the Senate was losing the fight while on the retail funds’ payroll.

ASIC chair James Shipton told the Joint Parliamentary Committee hearings that financial misconduct complaints had increased 20 per cent since the pandemic hit this year.

They centred on fake investment schemes, fake cryptocurrency products and romance site financial scams.

ASIC also confided that financial service companies had now paid back customers some $829m of the $2.9bn owed for myriad royal commission misdemeanours, such as charging for services not delivered.

ASIC was taken to task for quoting ATO figures that the costs of running self-managed super funds ran as high as $13,900 a year, when later ATO amended numbers and put it at more like $1300.

The argument is that ASIC raised concerns about self-managed funds, trying to scare people into putting money into industry fund coffers.

The fact is running a self-managed fund is not always a walk in the park and requires a certain levels of funds.

Wait on wagyu case

ASIC confided that a decision will be made by Friday on whether to appeal its wagyu and Shiraz responsible lending court loss, but it didn’t say what everyone expects and that is that it will not appeal to the High Court.

The fact is the original decision was clear and, while responsible lending is important, the problem now is how many loans will be deferred and what that will cost the economy.

In a dream world the government wants more bank lending to boost the economy, not less.

On the macro front, US majors JPMorgan, Citi and Wells Fargo this week lifted bad-loan provisions by a combined $US28bn to $US83bn ($119bn), lifting total provisions to more than 2 per cent of their loan book.

The issue in Australia is loan deferrals and whether people genuinely can’t pay the interest costs, so perhaps the loans should be reclassified as dud loans.

This would add costs to the banks and also present a national economic problem because small businesses and consumers will have too much debt.

Judo’s Joseph Healy has argued the government should look at schemes like those being considered in the UK, where small business debt could be converted into equity in a fund backed by the federal government.

The issue is important because the deferral of loans now until the year’s end may create a new cliff for the economy and Healy wants to ensure business remains productive.

Judo has about $2bn in loans outstanding compared to say NAB, which has some 50 times more small business loans on its books.

The opposing argument is that the bigger balance sheets of the big banks already provides a safety valve.

US banks tend to securitise their home loans, which means their balance sheets are more exposed to credit card and car loan debts, among others, which tend to be more vulnerable.

Australian banks like home loans because they earn about 20 per cent on the loans secured against property compared to small business loans, which are close to break-even levels.

ASIC has told the banks they should be dealing with borrowers to ensure the borrowers understand the costs of loan deferrals, and are open to classifying the debt correctly for the benefit of their shareholders.