S&P says Virgin capital raising should cover airline’s “near term funding requirements”

written by australianaviation.com.au | June 17, 2016
EMBRAER 190 VIRGIN AUSTRALIA BNE AUG15 RF IMG_9091
Virgin is removing all Embraer E190s from the fleet. (Rob Finlayson)

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.

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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.

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“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.

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9 Comments

  • Bob

    says:

    A very fine line for this company; I believe it will be fine, but then again, so did Ansett and Lehmann bros.

    I do know one thing, they screwed up the expansion and fleet optimisation across their airlines! Airbus, Boeing, E-jets….. you got to ask who was the idiots that signed up to that way of thinking and did they run the numbers correctly!!!??

    Given that they are probably the same people in the office mostly now as then, it must be a factor to the shareholder and the employee’s……

    They are not very forthcoming about the fleet announcements, which was DUE LAST YEAR.
    They simply cant compete unless they get more carbon framed a/c like the 787 or 350, and all go into NEO’s/Max’s. Simple…..

    Bloody CEO and their big paychecks, how about actually getting some traction, making some firm announcements to the market and your employees!

  • Mick

    says:

    What a mess.

  • Craigy

    says:

    @Bob What an uninformed rant.

  • Bowcher

    says:

    Actually the E-jets were purchased in the Brett Godfrey era and were one of the first fleet JB flagged as inefficient. Hence getting rid of the E170s.

    The A320 came as part of the deal for skywest

  • Martin

    says:

    Let’s hope Glen Stevens doesn’t try to drive down the value of the Aussie dollar. The Reserve Bank should act in a responsible manner and not be ruining the balance sheet of businesses that borrow money to expand their business.

  • TrashHauler

    says:

    Bob has a point. You need modern hardware these days (ie A350/787). Running 737s to Bali etc (even in Tiger colours), is hardly competitive.

  • Mac Carter

    says:

    Hopefully this company wont go the way of Ansett.
    There seems to be continuous capital raising to cover running costs.
    Not a good look.
    From a passenger perspective, the E jets are great.
    Will be very disappointed to see them withdrawn from the fleet.

  • Kim

    says:

    It seems their MD (Borghetti) is substantially overpaid for the results achieved. Has he ever seen a proper profit since he’s been in charge of Virgin? I believe the A330’s are not being fully utilized and sitting around on the tarmac at weekends. Big ideas – pity the Embraers have to go along with jobs. At least Mr Borghetti has his Porches. The other airline shareholders should replace this man with someone who can run an airline and give staff some semblance of security. I love Virgin and am sad to see it going the way it is.

  • Vannus

    says:

    Oh! Kim………
    John Borghetti is CEO, not MD, of Virgin.

    He may have ‘porches’ at front, & back of his house, but if he owns ‘Porsches’, they’d be in his garage’s!

    His 36 years’ career with Qantas surely gave him enough knowledge, & experience to ‘run an airline’.

    Unless YOU are in the job, you’ve no idea what pressures’ under which he possibly works.

    Care to swap jobs, & see how you’d go???

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