Click here to access the BondAdviser Ratesheet as at 20 June 2016
Earlier in the year Virgin Australia tapped strategic shareholders for a $425 million loan facility prompting a review of its capital structure to enhance cashflow and profitability. The last time Virgin went to these shareholders was in late 2013 ($90 million) when the aviation industry was facing poor consumer sentiment and high oil prices. Qantas was in an even worse position which resulted in management asking the Federal Government for financial assistance. Since then, Qantas has been able to recover strongly while Virgin’s financial health has been shaky and required an additional $336 million cash injection from the sale of 35% of its Velocity frequent flyer program in 2014.
The capital structure review was completed on the 14th of June 2016 and management concluded that a $852 million equity capital raising was required to further recapitalise the company. Major shareholders have made binding commitments to take up their pro-rata entitlements. This follows Virgin’s previous announcement on the 31st of May 2016 regarding its alliance with HNA Aviation Group. The commercial agreement will improve the group’s access to China and HNA proposed (subject to Chinese authority approval) an additional $159 million equity investment into Virgin Australia. This was approved on the 23rd of June. This investment together with its pro-rata entitlement from the equity raising will give HNA a 19.99% shareholding. As a result, proceeds from the two transactions would total $1,011 million and give Virgin further breathing room as management attempt to repair the group’s balance sheet.
- Etihad Airways
- Singapore Airlines
- Nanshan Group (19.98% stake sold by Air New Zealand on the 21st of June)
- HNA Aviation (19.99% post the equity raising)
- Virgin Group
- Air New Zealand (left with 5.9% stake post the Nanshan transaction)
The group has outlined that the proceeds will be used to repay outstanding balances of the shareholder loan facility and other debt facilities. $US Bondholders have reacted positively to the news.
Figure 1. Australian Airlines Comparable Trading Margins (as at 22nd of June 2016)
Source: BondAdviser ($US Virgin Bond – AUD Trading Margin Equivalent)
Figure 2. $US Bond VAH 8.50% 2019 Recent PerformanceSource: Bloomberg