The last ditch effort from bondholders to try and offer an alternative rescue plan for Virgin Australia marks a milestone for the private investor bond market - thousands of retail investors are on the line in a high stakes deal that is now going to play out in the full glare of national publicity.
For “mum-and-dad” investors, the potential returns from the new deal would be many times higher than they might have got under either of the alternative rescue deals put forward by Bain Capital or Cyrus Capital.
The new deal infers a return of about 70c in the dollar for bond holders; the rival deals are expected to return between 10c and 35c.
Retail investors in Australia have been very slow to enter the bond market, and even more shy of buying ‘junk” bonds - such as the Virgin Australia bonds - which were below investment grade.
Yet the ASX listing of Virgin bonds in October 2019 worked a treat. It was a high profile brand name offering a yield of 8 per cent and as the stockbrokers pointed out, a company ultimately backed by sovereign investors such as the Singapore government owned Temasek Holding, which is now backing the new bond deal.
In fact, the listing of the airline’s bonds went so well that the raising was lifted from an initial $150m to $325m.
For any informed investor, the high rate on the Virgin bonds coupled with their “junk” bond rating should have been an alarm bell. Even the most questionable investments in the market do not pay 8 per cent - the deeply troubled Mayfair 101 Group has only been promising at best 6.7 per cent for its investment products.
Substantial demand
Though we have substantial demand for “yield products” among retail investors, much of that money has traditionally been soaked up by big banks which are seen as “bond proxies”.
Similarly, the success of the so-called “hybrid” market - which is also dominated by banks - has meant bond issuance gets suppressed.
Steven Wright, a director of Morgans stockbrokers, who is representing Australian retail bondholders says: “The new proposal from bondholders is a key moment for our retail bond market. The ASX listing of Virgin bonds was expected to open up the market - the repercussions from this rescue will be significant.”
Under the new deal, the bond holders would have their holdings converted to equity in a revived ASX listing for Virgin Airlines.
The plan guarantees full employee entitlements, honours all travel credits and provides interim funding for the administrators of $125m through to the creditors’ meeting in August.
What happens next?
In reality, the retail bondholders are bobbing like corks on the ocean in this drama. They will be watching from the sidelines to see if the institutions - such as Temasek-backed Broad Peak Investment - can do a better deal than those already on the table.
“It’s a very good proposal with a very good alignment of interests,” says Wright at Morgans. “It deserves to be taken seriously.”
The winning bid for Virgin Australia is expected to be announced at the end of the month.
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