Virgin Australia’s $852 million capital raising and $152 million share placement with HNA will be enough to cover the airline group’s near-term funding needs, S&P Global Ratings says.
The capital raising along with the $159 million share placement with China’s HNA Group brings to $1.011 billion Virgin has raised since it announced a capital structure review in March.
S&P Global Ratings, formerly known as Standard and Poor’s, said the total amount raised was “sufficient to alleviate the near-term funding requirements” and it reaffirmed Virgin’s “B+” corporate credit rating.
However, its outlook on Virgin remained negative, given the airline group has 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 Thursday.
“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 said on Thursday the proceeds raised from its shareholders would be used to pay down debt, including a $425 million loan from major shareholders Singapore Airlines, Etihad Airways, Air New Zealand and Sir Richard Branson’s UK-based Virgin Group struck in March.
“We are seeking a reduction in leverage of around 15 to 18 per cent with the capital raised,” Virgin chief financial officer Geoff Smith said.
Under the share offer, existing shareholders can purchase one new share for every share they currently hold at a price of 21 Australian cents per share. This was a 28.8 per cent discount to the company’s closing share price of 29.5 cents on Tuesday.
Further, Virgin said SIA, HNA, Virgin Group, Nanshan Group and Air New Zealand had committed to take up their full pro-rata entitlements. Etihad said it was reviewing whether to participate in the capital raising.
SIA said in a statement to the Singapore stock exchange on Thursday it was “confident of the long-term prospects of Virgin Australia and was committed to supporting its long-term growth”.
“The SIA commitment will enable the company to remain as a substantial shareholder of Virgin Australia, and is in line with the company’s intention to ensure that its stake in Virgin Australia is not significantly diluted as a result of the HNA placement and the Virgin Australia entitlement offer,” SIA said.
The airline group is also embarking a cost-cutting program across all parts of the business, including the withdrawal of all Embraer E190 jets and a cull of between four and six ATR turboprops, as well as an unspecified number of job losses.
These changes were hoped to generate net free cash flow savings of A$300 million per annum by the end of the 2018/19.
However, there would also be restructuring costs of $200-250 million over the same period.
“We view these restructuring initiatives as necessary to restoring the airline’s profitability,” S&P said.
“We expect Virgin Australia’s operating performance to benefit from various initiatives currently underway.”
S&P said the arrival of HNA and Nanshan Group, which is buying 19.98 per cent of Virgin shares from Air New Zealand, on the share register “provide greater clarity over Virgin’s ownership structure”.
“We continue to view shareholder support as a key source of funding, as prevailing credit market conditions may render bank or debt capital markets issuance unfeasible,” S&P said.