Virgin Australia Financially Secure? [Now in Voluntary Administration]

[Quickstatus]

Would you or anyone else know where Velocity’s loan sits? Secured or unsecured?

The velocity/Loyalty Trust books are hidden and the lack of transparency smells of something dodgy.. Virgin says the Velocity loan was secured. Against what security? Junk bond? cos the interest rate is at that level...Whats the current bond value??. That will tell you how much its worth
The trustee is silent on the issue.

 

[ja1]

Under current economic conditions there is no rush to scale up
VA original (VB) was able to get flying within months not years
Worse for creditors? - Bidders have no concern for the interest of creditors.

While everyone is doing a distracted sticky beak at the VA crash and burn, no one is looking at who is coming in out of left field (I have no intel) .

AirNZ- what are they doing? Whats to stop AirNZ setting up an AirNZ Aus subsidiary?

Following these points in order:

- Profitability is to a large extent determined by scale
- VB had already launched well prior to Ansett falling over - it launched in late 2000.

The idea/planning for VB started in 1997! so only 3-4 years before it actually started operations.

Lets me generous and suggest it'll be much quicker this time (twice as quick). So only 18-24 months. Which puts a new operation flying sometime in 2022. Probably great timing in terms of the resumption of flying internationally..


Bidders do have a concern for creditors (indirectly) as if the creditor doesn't like their bid they can vote against it. So it isn't realistic to say they aren't structuring bids to keep creditors in mind. Especially since by numbers VA employees are 9000 out of the ~10000 creditors. And approval for a bid seems to come from some variant of creditors by value ($$) and actual numbers..

A good example of this is VW buying Skoda years ago - their bid was successful because (among other things) they had put in place a good deal for the employees to be kept.

Noone is looking at who is coming out of left field because noone is coming out of left field.

Australia is too small a market and too little growth (in numbers and routes) with a significantly already deregulated market (i.e foreign carriers can already fly here and do) for this to be high up on the list of opportunities.

AirNZ just had to borrow money / have loans guaranteed by the NZ government. They aren't in a position to look at expansion as the risk involved could well cause them to fold (again!) and you'd imagine the government has given them pretty clear marching orders to avoid that scenario at the moment... (NZ doesn't have a sovereign fund lying around to make long term strategic investments of this size like say Temasek.. )

There's a lot of smaller operators that could go back to flying (I've noticed FlyCorporate is advertising flights again) but nothing that could scale up to the size of VA.

 

[travel_bug]

The velocity/Loyalty Trust books are hidden and the lack of transparency smells of something dodgy.. Virgin says the Velocity loan was secured. Against what security?
The trustee is silent on the issue.

Neither Velocity Frequent Flyer nor Velocity Rewards as the trustee publish their accounts. I imagine the only time we'll find out the security is if they reach liquidation.
From this article back in April.

Failed Virgin tapped frequent flyer trust for loan

The trust set up to protect Velocity Frequent Flyer members lent up to $200 million to Virgin Australia, positioning it as a creditor to the failed airline.

www.afr.com

Commercial investments

The Loyalty Trust holds the cash of the frequent flyer scheme and it makes commercial investments on behalf of the members, including loans to Virgin.
Accounts show that the trust had paid regular distributions to Velocity Frequent Flyer, the operating company, including $75 million in 2019.
The operating company had limited cash, the accounts show. After paying more than $100 million in dividends in July and August, the company would have had about $5 million in cash and cash equivalents.
The dividend payments were made to Virgin and Affinity Equity Partners, which owned 35 per cent of the business at the time.
A Velocity representative said accounts for The Loyalty Trust were not public, and declined to provide further details. ‘‘The Loyalty Trust has a governance structure in place that includes an experienced, independent director as well as policies governing how trust funds are invested,’’ the representative said.
‘‘The terms of all arrangements with the trustee are confidential and as such we won’t be able to comment further.’’
The trustee for Velocity Frequent Flyer is Velocity Rewards. It, too, does not publish accounts.

 

[ja1]

The velocity/Loyalty Trust books are hidden and the lack of transparency smells of something dodgy.. Virgin says the Velocity loan was secured. Against what security? Junk bond? cos the interest rate is at that level...Whats the current bond value??. That will tell you how much its worth
The trustee is silent on the issue.

Hidden in what way ? There's no obligation for VA to publish this information. Velocity isn't a publicly traded company. VAH does report on Velocity in some detail in the annual report (did you look at the 2019 annual report ? there are 98 instances of Velocity in it... )

QAN certainly doesn't report on QFF or 'share its books' with the public.

Velocity is only unusual in that while it's part of the VAH group (being wholly owned by them) it has a governance structure that involves a trustee - which on paper sounds good. It isn't owned by a trustee though!

It would be helpful to not call it a 'Velocity loan' as more correctly it is a 'VAH loan for the purposes of buying the 34% of Velocity it didn't own from Affinity' - which is did for $700m.. (or probably more, I'm just going with the last segment I read in the 2019 AR..)

 

[Quickstatus]

Following these points in order:

The issue of the workforce is separate to the one with creditors. This is where the public sentiment and the optics of the bid comes into play.

While I accept your point, Skoda was a unique situation with the collapse of the Eastern Bloc presented a unique potential for Western carmakers.
Skoda needed Western investment after years of non investment and it was backed by the Govt of the day during the sale.( I think VW took 30% or so initially - going on to eventual buyout).

VA is different - no Govt backing - apart from Jobseeker/Jobkeeper and perhaps some musings by some State Govt. Years of capital investment burned up. A major competitor to contend with, an already deregulated market as you say - the value is not there.

Hidden in what way ? There's no obligation for VA to publish this information

Exactly that, hidden = lack of transparency (despite no requirement to publish the information).

'VAH loan for the purposes of buying the 34% of Velocity it didn't own from Affinity' -

Exactly, and what was the security of the loan?.
It is always raises questions when a purchase transaction uses the cash of the asset to pay for the purchase

 

[moa999]

The velocity/Loyalty Trust books are hidden and the lack of transparency smells of something dodgy.. Virgin says the Velocity loan was secured. Against what security?

Unfortunately they don't need to provide that information.
Much like Qantas provides limited info about QFF or even JQs international operations

The one good thing is it appears the loan was made when the PE guys invested and has rolled since then, so I'd at least expect that any security is meaningful.

(Of course if it's an aircraft it may have dropped on value these days)

 

[jakeseven7]

Maybe the REX dogfight can move to its own thread

Back on topic, Feds say no thanks again to VA1.

Govt rejects another bailout push for Virgin Australia

The Morrison Government has rejected another push by Queensland to bail out embattled airline Virgin Australia. Administrators admitted the airline did not have enough funding to remain operational beyond June. While all requests for financial support were rejected, the government insisted it...

www.skynews.com.au

 

[p--and--t]

Rex got a bailout and is part of the Fed Govt minimum domestic network with QF and VA, which makes none of them any money.

Post automatically merged: May 21, 2020

Rex would have stood down 90% of staff without bailout

Regional Express (Rex) and the Airlines for Australia and New Zealand industry group have both welcomed Saturday's $298 million government bailout for the regional airline industry.

australianaviation.com.au

Prior to Feb 2020

REX - profit every year for as far back as anyone can remember, own their own fleet, no concerning debt load

VA - unprofitable for 8+ years, insurmountable debts, very few assets, teetering

After Feb 2020

Every airline in the entire world - struggling because of covid and no passenger demand, downsizing staff, fleets and ditching services, many will not survive, a dozen already in receivership

 

[HappyFlyerFamily]

Maybe the REX dogfight can move to its own thread

Back on topic, Feds say no thanks again to VA1.

Govt rejects another bailout push for Virgin Australia

The Morrison Government has rejected another push by Queensland to bail out embattled airline Virgin Australia. Administrators admitted the airline did not have enough funding to remain operational beyond June. While all requests for financial support were rejected, the government insisted it...

www.skynews.com.au

In other words, stop paying for leases of unused planes?? Perhaps.

 

[travel_bug]

Maybe the REX dogfight can move to its own thread

Back on topic, Feds say no thanks again to VA1.

Govt rejects another bailout push for Virgin Australia

The Morrison Government has rejected another push by Queensland to bail out embattled airline Virgin Australia. Administrators admitted the airline did not have enough funding to remain operational beyond June. While all requests for financial support were rejected, the government insisted it...

www.skynews.com.au

If not even the administrators can keep it from bleeding money with Gov support like the baseline domestic network and JobKeeper and are now resorting to ongoing court orders limiting their own liability, I do not understand how anyone could still argue that the Gov should provide a cash injection to VA1 like it's a good idea.

Though the employment argument from the TWU is a worthy one, VA1's monetary issues are now part of its DNA and no one-off injection will stop future losses unless a full restructure is done under a voluntary administration process. This isn't a slight commercial blip that has caused VA1 to be in this position, years of losses coupled with a black swan event that will change flying as we ever knew it means that no bailout will actually do any good in the long run.

 

[RooFlyer]

Who in their right mind buys something burning an alleged $15m per week?

Well, that's an easy one. Anyone who produces a well-informed financial model where the entity has a discounted Net Present Value above $1 (theoretically) but in any event above a certain figure that gives a satisfactory rate of return.

Lots of businesses/corporates which are bid for are in a similar position to Virgin - for instance, companies developing a mine will be looking at hundreds of millions of costs over the first few years, then they return to a positive cash flow in 'steady state' operations. The bidder looks at the whole picture. There are severe risks up-front, like currency and commodity values going out the life of the model - 10 to 20 years, and you model those risks as well. Not unlike the risks facing the Virgin suitors; they just need to take 'a view'.

One thing, though. I think most of the second-round bidders have 'private equity' as their backers. 'Private Equity' usually takes a fairly short-terms investment view (< 5 years). They accept higher risks, but demand high rates of return. That is, they will run the business very lean, sell everything they can and lease it back etc. Then they flog it (think of Myers). So their models will be much shorter-term focused, and will include an exit strategy (but not for public consumption, though).

 

[serfty]

That is, they will run the business very lean, sell everything they can and lease it back etc. Then they flog it (think of Myers).

... or Dick Smith

 

[aaronm]

Anyone able to share recent experience of award booking cancellations? I've managed to cancel a couple using the online form and the bookings are showing as cancelled, will be surprised if the booking fee is refunded but should I expect the points to land back in my account?

 

[travel_bug]

Anyone able to share recent experience of award booking cancellations? I've managed to cancel a couple using the online form and the bookings are showing as cancelled, will be surprised if the booking fee is refunded but should I expect the points to land back in my account?

This thread may assist:
VA no longer issuing credits to travelbank (or anywhere else) particularly the last couple of pages that deal with cancelled reward bookings.

 

[ja1]

The issue of the workforce is separate to the one with creditors. This is where the public sentiment and the optics of the bid comes into play.

While I accept your point, Skoda was a unique situation with the collapse of the Eastern Bloc presented a unique potential for Western carmakers.
Skoda needed Western investment after years of non investment and it was backed by the Govt of the day during the sale.( I think VW took 30% or so initially - going on to eventual buyout).

VA is different - no Govt backing - apart from Jobseeker/Jobkeeper and perhaps some musings by some State Govt. Years of capital investment burned up. A major competitor to contend with, an already deregulated market as you say - the value is not there.



Exactly that, hidden = lack of transparency (despite no requirement to publish the information).


Exactly, and what was the security of the loan?.
It is always raises questions when a purchase transaction uses the cash of the asset to pay for the purchase

You make reasonable points but it's important to note that the employees of VAH *ARE* the majority of the creditors by number.

This is because when VAH is in the current state of proceedings, VAH owes each individual money. Which in turn makes each one a SEPARATE creditor. 9000 employees = 9000 creditors.

VAH separately owes money to around 1000 different corporate entities = 1000 creditors

My point on Skoda was the Czech govt of the day had a choice of who to select to sell to and chose VW because its total approach was the most acceptable politically - not because they offered the most money. One of the key political points was simply that VW looked after the people involved.

Hidden doesn't automatically mean lack of transparency as you need to draw some lines between what you should be transparent about vs what is competitive information. How you handle an aviation safety incident ? Absolutely be transparent. How much you pay your suppliers for services ? No way do you want to have that information being public.

It's a good question - I don't know if the loan was secured in any way and there's no actual requirement it needed to be. You do recognise that a bank offers you interest rate X on a secured loan and interest rate Y on an unsecured loan where Y is normally much higher than X.. the rate of return commensurate with the increased risk of no security..

I can't find any references to any security - I don't think there are any for the ASX notes or the US bonds that colelctively make up the $700m they borrowed.

 

[jakeseven7]

If not even the administrators can keep it from bleeding money with Gov support like the baseline domestic network and JobKeeper and are now resorting to ongoing court orders limiting their own liability, I do not understand how anyone could still argue that the Gov should provide a cash injection to VA1 like it's a good idea.

Agree, they won't and can't. It would be horrifyingly negligent.

There also is little public support for a fed gov funded bailout and politicians are reading that as well. Even our (QLD) state government had to reel back in their rhetoric on VA1 a bit after reading the tea leaves - which was good to see, now a lot more calm.

 

[p--and--t]

Even our (QLD) state government had to reel back in their rhetoric on VA1 a bit after reading the tea leaves

"Tea leaves" or social media posts of voters opinions?

 

[travel_bug]

"Tea leaves" or social media posts of voters opinions?

Do we know if the Qld Gov in their bid ever got entry into the data room? I wonder if those tea leaves would have changed their mind.

 

[jakeseven7]

"Tea leaves" or social media posts of voters opinions?

In 2020 social media posts are the tea leaves We run sentiment analysis all the time on them.

 

[ja1]

Just for interest sake since this came up around security - For VA's FY19 AR, on page 69 (Section D2) you can see that VA 'owned' about $2.8B worth of aeronautical assets (i.e planes?) and $2.5B of them was pledged as securities against borrowings.

So it's relatively safe to assume that most of not all of the ASX notes and the high yield US bonds aren't secured against anything - which is why they were paying 8.25%.. and as mentioned, are currently trading at about 15% of their original value.

In the event of a sale, the shareholders are going to get $0 (the equity isn't worth anything) which makes sense for 90% of the shareholders by value as most of them have written down their VA holdings to $0 already.

Secured creditors will presumably get somewhere between 95c to 100c in the dollar. Unsecured creditors may get somewhere between 15c and 0c in the dollar..

Anyone else disagree with this ?