Virgin Australia Financially Secure? [Now in Voluntary Administration]

[jakeseven7]

The minor one is about how 'surprise move (of bondholders) adds turbulence and how the 9000 staff aren't impressed. Steve Purvinas (interesting record with other things in the past) says there could be legal action and the whole shebang fall over.

There won't be 9000 staff after Bain/Cyrus are done with them, lets be clear.... I hope they act sensibly for the greater good when push comes to shove

As predicted, QF just announced their job cuts - 6000 - which were inevitable. Very sad for the people involved, VA have already been through several rounds of redundancies - I wonder how many more will go....?

 

[eastwest101]

Lots of interesting comments and responses to the new developments:

A source told The Australian journalists other global investment banks, pension funds and managed funds were also among the bond holders, who had “already showed their commitment to the airline” through their investments. The timing of the proposal — just six days before Deloitte is due to choose a winning bid — was unavoidable due to the administrator’s reluctance to give bond holders access to the data room earlier, the source added.


Some interesting opinions:

"The bondholders proposal is a true recapitalisation and something the administrators should have been pursuing from the start instead of a fire sale. The unions have no basis to oppose the bondholders proposal because it gives employees......."

"The timescale for the Administration to end has always been optimistic. A short list of two bidders was decided, excluding many others who were interested and had spent time and money investigating their options. Now a new offer arrives out of the blue which appears to have merit. If this is to be considered, and maybe accepted, then the whole process is flawed."

Some divided opinion about whether the last-minute bid by bondholders is just spoiling and/or greenmail tactics, or is an actual genuine bid that wasn't able to properly participate in a flawed process? In which case were there other genuine bids that should have been considered in this rather opaque process?

 

[RooFlyer]

Does it matter if a particular group is 'fully informed' ? They may be confident enough in their understanding of what's needed to proceed without being fully informed. They may have other sources of data that mean they are possibly more informed than other bidders.. This isn't a standard retail offering after all..

But the risk for everyone is that they get a ‘nasty surprise’ when they get in the drivers seat. A “oops we didn’t expect that, all our promises are void” wouldn’t be in anyone’s interest.

. I would suggest if a new bidder showed up at the very last minute and offered $200m more than everyone else they are going to consider i

But it won’t be a simple $ figure offered. They are all going to be contingent on this and that, staged conditional on such and such. That’s why I think it would be hard for them to bid meaningfully. They might have a higher offer “$” vale but it should be discounted higher for risk and so the NOV would deteriorate.

 

[jakeseven7]

But the risk for everyone is that they get a ‘nasty surprise’ when they get in the drivers seat. A “oops we didn’t expect that, all our promises are void” wouldn’t be in anyone’s interest

Let’s be clear - this is 100% going to happen, I’m sure there are land mines buried all around VA1, a company of that size run so poorly for an amount of time it is a guarantee.

Any new owner will have plenty of ammo to drastically change direction once they have the keys....

 

[Carrots]

Let’s be clear - this is 100% going to happen, I’m sure there are land mines buried all around VA1, a company of that size run so poorly for an amount of time it is a guarantee.

Any new owner will have plenty of ammo to drastically change direction once they have the keys....

Even more realistically, they could be diffused WWII relic landmines that are nothing more than museum pieces, but they'll provide "justifiable" cause.

And to be fair, although sad given the human cost, it's understandable.

 

[RooFlyer]

Let’s be clear - this is 100% going to happen, I’m sure there are land mines buried all around VA1, a company of that size run so poorly for an amount of time it is a guarantee.

It would be interesting to know what reps and warranties the Administrator is offering on disclosure of information. That is, can the bidders know that they have had the opportunity to review everything material and rely on it. Usually there are such Rs & Ws. But miss-analysis or interpretation is on the offerors head.

I was once in charge of a sale of a mine with a disaster of a mine site and documentation was poor. We said to due diligence parties: take as long as you want, ask anything you want, fullAccess to management and everyone ... analyse everything in sight .... but we offer no reps or warranties what so ever. You buy it,it’s yours, no comeback, sign here to enter. Got more than we were expecting and the buyer resurrected the mine and ran it well.

 

[ja1]

But the risk for everyone is that they get a ‘nasty surprise’ when they get in the drivers seat. A “oops we didn’t expect that, all our promises are void” wouldn’t be in anyone’s interest.

But it won’t be a simple $ figure offered. They are all going to be contingent on this and that, staged conditional on such and such. That’s why I think it would be hard for them to bid meaningfully. They might have a higher offer “$” vale but it should be discounted higher for risk and so the NOV would deteriorate.

The job of the administrators isn't to get the 'best possible long term outcome for the greater good' which I've seen a number of references to here. It's simply to get the best possible (most equitable?) outcome for the creditors. And that's measured at a point in time - now - not 'best possible outcome 10 years from now'.

I realise it's not a simple dollar figure simply because most offers are not simple dollar figures. If there was one the administrator would almost certainly take it. It was to make the point that there's an assessment of both 'best possible outcome' and 'likelihood of that outcome'. e.g. if the administrator has an offer that delivers $200m more but that payment is 5Y down the track and they assess it may never happen they have a rationale for not accepting this as the best possible outcome that involves cash being paid directly today.

To reiterate, it's not the administrators job to work about surprises for the eventual group in the drivers seat. That is the bidders/bondholders issue and the whole reason there's a data room.

There has also been some really useful/insightful commentary here based on the QAN announcement that has a lot of implications for VA moving forward. There is no 'quick return' path available to any airline and QAN's figures of burning $40m a week should make a lot of people think about the reality of what's happening.

The TWU's position on this seems laughable - to go back to the Federal government to get money and that would solve the problem..

 

[antycbr]

The TWU's position on this seems laughable - to go back to the Federal government to get money and that would solve the problem..

They can only ask... However the Government is in a bind as I am sure that backbenchers want to assist QF to some extent. I think QF have shown that they're prepared to cut back where needed, now VA will need to do similar. I do note that VANZ crew bases which operted the Tasman have all been closed and the employees retrenched prior to administration.

The question is will VA chop the VA(I) longhaul crew. Any assistance offered to QF such as an extension of Jobkeeper for their longhaul crew needs to be matched to VA to hold to the position of "sector" assistance.

In my opinion an extension of JobKeeper whilst the Biosecurity order preventing international travel is in force is entirely justifiable.

 

[RooFlyer]

The job of the administrators isn't to get the 'best possible long term outcome for the greater good' which I've seen a number of references to here. It's simply to get the best possible (most equitable?) outcome for the creditors. And that's measured at a point in time - now - not 'best possible outcome 10 years from now'.

I realise it's not a simple dollar figure simply because most offers are not simple dollar figures. If there was one the administrator would almost certainly take it. It was to make the point that there's an assessment of both 'best possible outcome' and 'likelihood of that outcome'. e.g. if the administrator has an offer that delivers $200m more but that payment is 5Y down the track and they assess it may never happen they have a rationale for not accepting this as the best possible outcome that involves cash being paid directly today.

To reiterate, it's not the administrators job to work about surprises for the eventual group in the drivers seat. That is the bidders/bondholders issue and the whole reason there's a data room.

Not sure if that was specifically directed towards me , but largely reflects what I've been saying except I think that the Administrator's recommendation should take a medium-ish view into account. Putting another turn on the second para, if there is a realistic pathway to get, say 80c in the dollar in, say 5 years (discounted that might be 70 cents), Vs an offer that gives 40c in the dollar, now, but never any more, and other things being equal, it might get the Guernsey.

As regards calculating possible outcomes, I recommend boning up on the Monte Carlo Simulation technique.

This wikipedia article makes it seem very complex. Basically for each uncertainty, you calculate a probability curve of occurrence (eg for currency, inflation, fuel price, when flights will resume 50% and 90% capacity, leasing prices, fare spreads ... probably dozens of factors in the Virgin valuation model, so dozens of curves.

Then you set the computer to randomly select a result from each probability curve and plug all those results into the model and you calculate the value or outcome. Then it selects another set of variables at random & calculates the value again ... do this a few thousand times, and you get a spread of outcomes that takes ALL the variability in the inputs into account. And a value with the highest weighted probability, and standard deviations about this.

I know this isn't strictly relevant, sorry, but I have very fond memories of Monte Carlo simulation and it once made me quite a bit of money.

 

[jakeseven7]

Not sure if that was specifically directed towards me , but largely reflects what I've been saying except I think that the Administrator's recommendation should take a medium-ish view into account. Putting another turn on the second para, if there is a realistic pathway to get, say 80c in the dollar in, say 5 years (discounted that might be 70 cents), Vs an offer that gives 40c in the dollar, now, but never any more, and other things being equal, it might get the Guernsey.

As regards calculating possible outcomes, I recommend boning up on the Monte Carlo Simulation technique.

This wikipedia article makes it seem very complex. Basically for each uncertainty, you calculate a probability curve of occurrence (eg for currency, inflation, fuel price, when flights will resume 50% and 90% capacity, leasing prices, fare spreads ... probably dozens of factors in the Virgin valuation model, so dozens of curves.

Then you set the computer to randomly select a result from each probability curve and plug all those results into the model and you calculate the value or outcome. Then it selects another set of variables at random & calculates the value again ... do this a few thousand times, and you get a spread of outcomes that takes ALL the variability in the inputs into account. And a value with the highest weighted probability, and standard deviations about this.

I know this isn't strictly relevant, sorry, but I have very fond memories of Monte Carlo simulation and it once made me quite a bit of money.

I wonder if VA2 will stock Monte Carlo biscuits in their down marketed lounges?!

 

[Melburnian1]

This is part of an article online that will be in the print edition of 'The Australian' on Friday 26 June 2020:


'The announcement that Qantas is to lay off 6000 staff, and indefinitely stand down another 15,000, amid expectations of international travel being shut down for another year, has cast a sombre note over the sale of Virgin, now in its final days.
While Virgin’s administrator Deloitte’s Vaughan Strawbridge is well down the track with the sale — with a preferred bidder to be announced by next Tuesday — the funereal like announcement by Qantas chief executive Alan Joyce was a stark reminder that many thousands of jobs will be lost in the aviation industry in coming months from both Qantas and Virgin.

The question for Virgin’s 9000 staff is not if jobs will be lost, but how many will be shed in the inevitable restructuring which will happen regardless of which bidder wins — New York hedge fund Cyrus or private equity group Bain Capital.

Virgin’s unions have done a good job putting their case and pointing out that they have a say at the creditors meeting on August 21 which gets to vote on a proposal to be put forward by the administrator, given that the proposal had to be approved by a majority of creditors by number (aka Virgin’s 9,000 workers) as well as by value (the $7bn lenders and bond holders).

But Joyce’s announcement on Thursday was a stark reminder to Virgin’s unions of the limitations of their bargaining power in an airline industry recession.

If they don’t like what is on offer from Virgin’s new owners, there are now going to be another 6000 Qantas workers on the market looking for jobs...'

 

[OATEK]

Not sure if that was specifically directed towards me , but largely reflects what I've been saying except I think that the Administrator's recommendation should take a medium-ish view into account. Putting another turn on the second para, if there is a realistic pathway to get, say 80c in the dollar in, say 5 years (discounted that might be 70 cents), Vs an offer that gives 40c in the dollar, now, but never any more, and other things being equal, it might get the Guernsey.

As regards calculating possible outcomes, I recommend boning up on the Monte Carlo Simulation technique.

This wikipedia article makes it seem very complex. Basically for each uncertainty, you calculate a probability curve of occurrence (eg for currency, inflation, fuel price, when flights will resume 50% and 90% capacity, leasing prices, fare spreads ... probably dozens of factors in the Virgin valuation model, so dozens of curves.

Then you set the computer to randomly select a result from each probability curve and plug all those results into the model and you calculate the value or outcome. Then it selects another set of variables at random & calculates the value again ... do this a few thousand times, and you get a spread of outcomes that takes ALL the variability in the inputs into account. And a value with the highest weighted probability, and standard deviations about this.

I know this isn't strictly relevant, sorry, but I have very fond memories of Monte Carlo simulation and it once made me quite a bit of money.

There also seems to be a place for Agency Theory in the kitbag of the key players, via Unions, QLD government etc.

 

[travel_bug]

Cyrus has withdrawn bid according to Brisbane Times - only just reading through article now, can’t see any other media on it.

Bain Capital strikes deal to buy Virgin Australia

Virgin's administrator says it has agreed to sell the bankrupt airline to Bain Capital but has offered no details about the size of the bid, job losses or how much money creditors will receive.

www.google.com

SMH at this point provides slightly more information, apparently due to “lack of engagement” on the part of Deloitte.

Bain Capital strikes deal to buy Virgin Australia

Virgin's administrator says it has agreed to sell the bankrupt airline to Bain Capital but has offered no details about the size of the bid, job losses or how much money creditors will receive.

www.smh.com.au

 

[MarkD]

Just announced, Bain Capital is winner as Cyrus have pulled out.
Lets see if they follow suit

 

[travel_bug]

Just announced, Bain Capital is winner as Cyrus have pulled out.
Lets see if they follow suit

Though Cyrus has pulled out, I don’t think Baine is the winner by default, though controversial, isn’t the bond holders’ bid is still on the table?

 

[RooFlyer]

I wonder if they got cold feet after Qantas' announcement? "lack of engagement' for the last week of a process ... you would hopefully think that they didn't need anything in the last week, and the lack of it meant total abandonment of what they thought for months was a good idea. EDIT: Sorry for the tortured grammar! Its early.

Extract from the OZ:

New York hedge fund Cyrus has withdrawn its offer for Virgin Australia, leaving the way for private equity fund Bain to win the battle.

Cyrus said in a statement on Friday that it had decided to withdraw its offer “due to lack of engagement by the administrator”.

The move leaves the way for Bain to be named as the preferred bidder.

In a statement released on Friday morning Cyrus complained that the administrator, Deloitte’s Vaughan Strawbridge, had not returned called or emails or meaningfully engaged with it since earlier this week.

“After thousands of hours of detailed due diligence, business planning and stakeholder engagement from Cyrus and its advisers over the past two months, Cyrus has decided to withdraw its offer to acquire Virgin Australia, due to lack of engagement by the Administrator,” the Cyrus statement said.

“On the morning of 22 June 2020, Cyrus presented to the Administrators of Virgin Australia Holdings an offer to acquire the airline, its regional business and the frequent flyer program Velocity, in accordance with the Administrators’ procedures. However, since then, the Administrators have not returned calls, emails, or meaningfully engaged with Cyrus to progress its offer.

 

[MarkD]

Though Cyrus has pulled out, I don’t think Baine is the winner by default, though controversial, isn’t the bond holders’ bid is still on the table?

Agreed, they have deep pockets, however should the business case not make sense, they will walk. There is a reason they have deep pockets. Sadly, Im beginning to get the feeling its all about to go AOT. and a fire sale is imminent. I do hope I am wrong for the sake of the employees and for travel generally in Australia.

 

[RooFlyer]

however should the business case not make sense, they will walk

If the business case didn't make sense, they wouldn't have put in a bid!!

 

[MarkD]

If the business case didn't make sense, they wouldn't have put in a bid!!

Its a very dynamic scenario.

 

[jakeseven7]

Well it was commented ALL along that Cyrus was shaky on the capital required and Bain was stronger.

This hands a lot of power to Bain to go a lot harder than they pitched to reshape the business and take it more no frills - which is what they wanted to do before the unions started going at them at them in the media.