Moody’s maintains Virgin’s B2 corporate rating

written by australianaviation.com.au | June 21, 2016
A Virgin Australia Boeing 737-800 at Melbourne Airport. (Rob Finlayson)

Moody’s has maintained its B2 corporate rating on Virgin Australia following the announcement of the airline group’s $852 million capital raising.

In April, the ratings agency placed Virgin under review for a credit downgrade in response to the company’s stretched balance sheet and after the Air New Zealand said it wanted to offload its stake in the Australian carrier.

That review has concluded with Moody’s keeping Virgin’s corporate rating at B2, while the company’s senior unsecured debt rating was unchanged at B3. Both ratings were below investment grade.

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Moody’s said Virgin’s proposed fully-underwritten equity raising and more certainty around its shareholding were behind the decision.

“The confirmation of Virgin Australia’s ratings reflects our expectation that its debt/EBITDA (Moody’s-adjusted) and liquidity profile will improve following the proposed equity raising,” Moody’s vice president and senior analyst Ian Chitterer said in a statement on June 17.

“The rating confirmation also reflects the improved clarity around Virgin’s future ownership structure after the recent changes in the key shareholders.”

Moody’s noted Virgin’s adjusted debt to earnings before interest, tax, depreciation and amortisation (EBITDA) was expected to be around six times for the 12 months to June 30 2016, which was “within the parameters set for its B2 corporate family rating”.

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This compared to an adjusted debt to EBITDA of 7.2 times for the 12 months to December 31 2015.

Virgin will welcome Nanshan Group to the share register after the Chinese conglomerate agreed to buy 19.98 per cent the airline from Air New Zealand for A$0.33 a share. That sale was completed on Tuesday.

Separately, Virgin also announced a share placement to HNA Group, which will acquire 13 per cent of the airline for $159 million as part of a commercial alliance between the pair.

Moody’s has also maintained it negative outlook for Virgin.

“The negative outlook reflects the execution risks involved in the announced operational and capital efficiency initiatives in a challenging environment,” Moody’s said.

“The outlook could revert to stable if the operational performance and cash flow improve to a level which will enable Virgin to maintain the credit metrics at the B2 level without further reliance on shareholder support.”

The outcome of Moody’s ratings review comes after S&P Global Ratings said the total amount raised from capital raising was “sufficient to alleviate the near-term funding requirements”.

S&P Global Ratings, formerly known as Standard and Poor’s, also reaffirmed Virgin’s “B+” corporate credit rating and negative outlook, noting the company had little leeway to deal with any further deterioration in the operating environment.

“The negative outlook reflects our assessment of Virgin’s limited buffer at the current rating level to absorb volatile fuel prices, foreign exchange movements, and variable passenger demand,” S&P Global Ratings credit analyst Graeme Ferguson said in a statement on June 16.

“A stable outlook would be contingent upon the effective execution of the group’s growth strategy and continuing progress in improving key credit metrics, such that we expect the airline’s debt-to-EBITDA will remain comfortably below 5x.”

Virgin shares were steady at 25.5 cents in morning trade on the Australian Securities Exchange on Tuesday.

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