News on the planned refinancing of Virgin Atlantic has been relatively quiet in recent weeks.
That’s not necessarily a bad sign. Leaks to the press happen for a reason and less so when people are busy making progress behind closed doors.
Mark Kleinman of Sky News has today, Saturday 27 June 2020, published an account of the current state of play.
The planned refinancing of Virgin Atlantic is complex with multiple interests and parties involved.
Based on the account by Mark Kleinman, who obviously has excellent sources and is consistently ahead of his competitors, this is the current state of play.
Virgin Atlantic is targeting an overall privately funded package of around £800m-£900m. This is higher than its earlier stated target of £750m of government and private sector support. Virgin seems to have given up on any hope of state support.
There is an informal deadline of early July to have at least an outline agreement in place.
It is also claimed that much of the overall package of funding for Virgin will come from the deferral of fees and payments owed by the airline, rather than new capital.
Delta and Virgin Group
Virgin Group and Delta Air Lines who own 51% and 49% of the airline respectively are said to be providing around £250m of new funding for Virgin Atlantic.
How this will be comprised is not clear.
In the case of support from Delta and Virgin Group, Delta CEO Ed Bastian has previously said it is unable to provide further financial support due to it having received financial assistance from the US Government under the CARES (Coronavirus Aid, Relief, and Economic Security) Act.
Virgin Group has disposed of some its interest in Virgin Galactic to raise nearly $500m in funds to support Virgin businesses.
Currently, Virgin Atlantic and Virgin Holidays pay a percentage of their revenues as a royalty for the use of the Virgin name and logo to a company called VAL TM Ltd. In the last published accounts for VAL TM Ltd for the year to 31 December 2018, it reported revenues of over £19m.
Virgin Atlantic and Delta also make sales and purchases between each other under their transatlantic joint-business. In Virgin Atlantic’s last published accounts for the year to 31 December 2018, it made £6.4m of sales to Delta and purchases of £72.2m from Delta.
Under a concept known as “transfer pricing” Virgin Atlantic has to make “arms length” payments to Delta and Virgin Group for services it receives from them, but deferring these would at least provide some cash flow relief.
Whilst Virgin Group is expected to retain control of Virgin Atlantic, it has not been confirmed whether Delta will retain its shareholding.
As has been previously reported, Elliott Management Corporation are in discussions to provide up to £250m in debt funding. As is Davidson Kempner Capital Management which is said to be a marginal front runner.
These organisations are no pushover. They will not provide new funding unless they are confident they can get it back regardless of what ultimately happens to Virgin Atlantic. How they will obtain security given Virgin leases most of its fleet and has already mortgaged Heathrow slots is not known.
Virgin is also hoping to secure support from credit card companies who have been withholding funds because of the risk of the airline falling into administration.
The airline also has a revolving credit facility of $237m, secured against certain assets, which is due to expire in 2021 and it is seeking to amend and extend.
What Happens Next?
Deadlines for Virgin Atlantic to secure financial support have slipped and will no doubt do so again. A previous target was early May.
Any deal will require the approval of bondholders who hold security over Virgin’s Heathrow slots which the airline used to raise £220m in 2015.
When a deal is ultimately announced, Virgin will of course aim to put a positive spin on it all with inevitable digs at BA.
Virgin is due to restart scheduled passenger flights on 20 July with the aim of restoring most of its London route network by October 2020.
The airline is particularly exposed to the transatlantic market, with no short-haul network to fall back on. With the US now reporting record numbers of new infections, travel to the US is unlikely to resume in a meaningful way for many months. The same can be said for other markets such as India and South Africa. The return of business travel is likely to lag the reopening of borders by many months further.
According to the Financial Times only six companies are in active discussions with the Treasury on securing specific state support and no airlines have been named.
Prior to publication of the Sky News article Delta CEO Ed Bastian confirmed to BBC News: “We’re not planning on injecting additional capital into Virgin. We’re supporting them in doing everything we can, helping them through a restructuring, hopefully to avoid an in-court process, and I’m still optimistic, cautiously optimistic that we’ll be able to get there”.