Virgin Australia collapse: creditors meet amid speculation of steep losses for investors
Creditors of grounded airline Virgin Australia are to meet on Thursday morning as speculation mounts that investors who poured almost $2bn into high-risk debt issued by the company face steep losses.
Estimates of how much the investors, who range from the Anglican church to giant US fund managers, are likely to receive if administrators Deloitte successfully sell Virgin Australia vary from as little as 7c in the dollar to as much as 65c in the dollar.
Creditors of the airline, which collapsed into administration owing $6.8bn last Tuesday after the Morrison government rebuffed its pleas for a bailout, are to meet via videolink at 11am.
The meeting could have seen a challenge from employees to the role of partners at Deloitte as administrators, but this now appears unlikely after unions threw their support behind the accounting firm.
Deloitte said no offer to buy the airline would be put before creditors. Administrator Vaughan Strawbridge has previously said that more than 10 parties are interested in tipping money in to get Virgin Australia recapitalised.
Potential buyers are reported to include BGH Capital, a private equity firm run by Ben Gray and backed by Singapore sovereign fund Temasek, WA conglomerate Wesfarmers and US airline investor Indigo Partners.
Last week Strawbridge told the federal court Virgin Australia had about 12,000 creditors, including banks, aircraft financiers, landlords and its 9,000 employees.
The positions of aircraft financiers and banks are secured against the assets of the airline, and employee entitlements also enjoy priority under the law.
However, the debt investors have no security and rank second-last before the company’s shareholders, including Abu Dhabi-backed airline Etihad, Singapore Airlines and two Chinese tourism groups. The shareholders are expected to see their investments wiped out as part of any deal.
Virgin Australia raised money from yield-hungry debt investors as recently as November, when it issued $325m in notes, listed on the Australian stock exchange, that were to pay a sky-high interest rate of 8%.
It issued the Australian notes alongside US$425m worth of debt that was sold into the US market as part of a package of funding mostly used to buy back its frequent flyer program, Velocity.
The Australian notes were organised by Swiss bank UBS and sold through brokers including Crestone Wealth Management and Escala Partners to clients who, sources said, were primarily rich families.
At the time, the notes were recognised as high risk, with specialist debt investment group Narrow Road Capital telling clients they were “very junky”.
In a note to clients, Narrow Road Capital portfolio manager Jonathan Rochford said ratings agencies appeared to be giving Virgin Australia an easy run, “banking much of the hoped for turnaround benefits that the new CEO [Paul Scurrah] is promising”.
“Given this business has a long history of under-delivering on turnaround strategies that’s a significant stretch,” he said.
He also warned investors that the business was already in a parlous financial state and its planes were heavily mortgaged, leaving “little in the way of hard assets for unsecured lenders”.
ASX and company documents show buyers of the notes included the Anglican diocese of Newcastle, as well as companies controlled by John Nicolis, who is a former investment banker and director of fast food chain Pie Face, golf course developer Duncan Andrews and Brisbane-based racehorse owner Mike Buys.
None of the investors have so far seen a cent in returns, as the first payment was due to be made in May.
Nicolis and Buys declined to comment, and Andrews could not be reached.
However, the bishop of Newcastle, Dr Peter Stuart, confirmed his diocese had bought the notes as part of its investment portfolio.
ASX records show the diocese bought $3m worth of notes.
“This represents 1.6% of the investment portfolio,” Stuart said.
He said the federal government “has to make strategic decisions about financial support for industries” and Australia needed two airlines.
“This will be even more significant as part of the economic recovery,” he said. “We hope that good support will enable the mitigation of losses and assist Australia’s tourism industry when we are able to travel more widely.”
Meanwhile, US Securities and Exchange documents show that investors in high-yield debt issued in America include funds run by big financial institutions including UBS, Invesco and Pimco, as well as a host of smaller money managers.
The US debt is due to be repaid at various times between next year and 2024 and pays interest rates similar to the Australian notes.
While trade in the Australian notes is suspended, a market source said the US debt was currently trading for between 7c and 17c in the dollar.
This could set up a conflict with Australian noteholders, who another market source said were hopeful of getting as much as 65c in the dollar.
“There’s not going to be a consensus in this, there never is,” the source said.
“It’s not even a conversation for people onshore. What is most likely is that someone is going to come in, like a distressed debt player, and price everything.”
Others expect a lower return.
“Unfortunately these sort of things happen,” one noteholder said. “If something comes out of it, that’s great, but you tend to just write things like this off.”
A Deloitte spokesman said that at Thursday morning’s meeting the administrators would “outline to creditors the nature of their appointment and how they expect the process to pan out”.
“Nothing will be disclosed around specific interested parties” who might buy the airline, he said.
A committee of creditors, which will oversee the administrators’ work, will be formed after the meeting.
Michael Kaine, the national secretary of the Transport Workers Union, which has been one of the most aggressive in pursuing the interests of its members employed by Virgin, was expected to nominate for the committee.
Kaine said he supported Deloitte continuing as administrators and repeated his call for a government bailout.
“A Commonwealth stake in Virgin is inevitable and highly desirable if our industry is to return to health, maintain its workforce and serve the national interest,” he said.
“The TWU and other unions will be supporting Deloitte as administrators and look forward to working with them on the committee of inspection to ensure the best possible outcome for the company and its workers.”
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