Administrators push for Virgin bailout

With Virgin fast running out of cash, its administrator, Vaughan Strawbridge, has called for a government loan to fund the sale process:

Virgin, which is estimated to be burning through about $15 million a week, has about $100 million left in the bank.

Binding offers are due in less than four weeks, on June 12, and increasingly, parties expect the airline will need more cash to keep operating until the creditors’ meeting in August.

“[Deloitte administrator Vaughan] Strawbridge’s comments [about additional funding options] are widely seen as a pre-cursor to a government bailout,” a source said…

If granted, this loan – likely to be in the tens-of-millions – would pale into insignificance against the $1.4 billion demanded by Virgin and Labor in March, which would have been pissed up against the wall given Virgin owed 10,000 creditors a combined $6.8 billion.

If this loan can facilitate the emergence of a Virgin MkII airline that uses its existing staff and aircraft fleet, it would be taxpayer money well spent.

Unconventional Economist
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Comments

  1. It’s a debt that would rank higher than existing debts so would be pretty safe. Investment banks and hedge funds do that sort of lending all the time – ask them for the loan, not the government.

    • Yep, there’s heaps of investors who’d front a loan that ranks senior to all other debt, however, I’m not sure, even in Administration whether you can subordinate existing senior loans – or is all the debt seemed to have been defaulted on?

      • The AFR article seems to suggest that a loan to the administrator in this this case ranks effectively the same as the administrator’s fees. I think that means it ranks above everything except tax and employee entitlements. Been a while since I looked at it though.

        The issue is that it is for a relatively short period of time but the work involved (and legal costs) would be substantial. So a private lender would want a very significant return for such a loan. It looks like the administrator is trying to undercut that by getting a loan from the government (who obviously would have similar upfront costs given the complexity of it all) presumably at a cheaper price. So, really it is just rent seeking from the administrator.

        • As an aside, Obama’s administration infamously extended a loan to a California-based ‘green energy’ business – Solyndra – but the business (inevitably) went bust and it emerged that the Gubmint loan actually ranked subordinate to the equity holders (which must be a world first), so the taxpayer basically lost $500m and the equity holders made out like bandits because they paid themselves a series of dividends before it all went belly up.

          Several other green energy loans went bust too, costing the taxpayer a mere $2.2bn … put some pork on your fork!

    • Good point. Maybe those middlemen prefer to avoid it for reasons known only to them……

      • Looks like the loan would only be out the door for a short period of time but the complexity of it all (plus the inevitable litigation risk when the other lenders become subordinated) would mean that a hedge fund etc would want a very chunky return for providing such a loan. The administrators inevitably won’t want to pay that (because it makes them look a bit incompetent) hence, I think, the reach out to the govt.

  2. How’s about a repo agreement on a few planes in exchange?

    5yrs ought to do it.
    They belong to gov.au until they are repo’d in 5 years.

    Failure to pay = gov sells them.

    • The Penske FileMEMBER

      Being a Platinum member of Virgin I noticed that the planes were looking old. Just like Q’s old 767s did before retirement. Perhaps the current planes don’t have another 5 years in them.

      • They’ve got nearly 80 737-800s which are at a maximum 24yo. Plenty of life in them. They ordered 50 in 2010 from Boeing so I would expect most of them are only 10yo.

        Upholstery may look crap, but that’s cosmetic.

    • Would Virgin own the planes ?
      I thought leasing them would be more the normal practice.

    • They are all leased, as Dr Ongo suggests.

      Besides, what’s a plane actually worth in the open market right now? Even a new one

  3. Ah nice. A government loan. That will be more palatable to the strayan taxpayer. Interest revenue and it’s good for jobs too!

    Nevermind that it’s a certainty the loan will never be repaid and quietly written off by the government in future years. The only winners, once again will be the parasite lawyers, bankers, administrators and lobbyists all clamouring around the rotting corpse for their clip.

    • SanchezMEMBER

      Exactly the cash is running out to pay the parasite administration fees and legal fees.

      • NoodlesRomanovMEMBER

        Yep, the big four must be loving this. Administration/Receivership provides all sorts of avenues to whack some time charges on. Then taking care of the subsequent M&A – glorious. A lot of 104 hour weeks coming up.

  4. Love to know how much of that $15 million a week is administrator super profits feasting on the carcass and how much is legitimately related to aircraft storage and maintenance and employee salaries.

    • working class hamMEMBER

      A friend of mine was involved in a company that was Deloitted.
      Only a few hundred thousand insolvent. Once Deloitte were finished, 3.5m got wiped clean from creditors and Deloitte pocketed 3.3m in fees. The admin assistant, was getting billed at $180k pa.
      You can bet all of that $100m will be gone, with any extra cash loaned to Virgin now, once it’s over.

  5. Ronin8317MEMBER

    If the government refuse a handout, then the creditors may end up with something. After the government loan it will drag it on forever until the creditor gets nothing.

    Why would it take until August to find a buyer when you have so many parties interested?

  6. No, that removes all incentive to get a deal done, by now there has been enough interest for buyers to know what they are up for.

  7. Offering a contrary opinion we all know that a post COVID world is going to look very different; especially since I doubt that a vaccine will be developed anytime soon that covers all potential strains of the virus. We have a flu vaccine; and I still manage to get the flu most winter’s. I personally think air travel as it was is unfeasible now at least for the next few years.

    In this context the need for another “airline” as immediately valuable to the country isn’t as obvious to me as it is to the writer – air travel for most of the population is not essential service. It is a highly discretionary business unlike what governments and airlines are trying to portray it as. Sure your holiday or business trip is more expensive; nothing else changes much for the average person on the street. If airlines enforce all rules as recommended by impartial medical experts (e.g. social distancing) air travel will become significantly more expensive and be reserved for the rich as it once was – maybe a smaller single airline is all it takes to serve this market? Maybe prices do in fact need to rise to make this in the longer term viable in some form?

  8. The way Dutton was banging on about it, I’d be willing to bet he has a healthy portfolio of shares in Qantas.

  9. ask the Billionaire boy genius – no not Musk, the original, Branson, make him sell his island