Air New Zealand is considering options in relation to its 26% ownership of Virgin Australia, including a sale. The associated uncertainty has triggered negative outlook responses from both credit rating agencies. We look at the potential scenarios for Virgin Australia bondholders in relation to Air New Zealand’s equity stake and impacts on the credit.
Recently, Virgin Australia’s (‘Virgin’) major shareholders injected AUD425m through a subordinated loan, which we viewed as a credit positive event. Surprisingly, not long after, Air New Zealand (Air NZ) announced it is exploring options with respect to its shareholding in Virgin Australia, including a possible sale of all or part of its circa 26% stake. With a current market capitalisation of AUD1.32bn, Air NZ’s equity stake is valued at around AUD340m. A link to the announcement is available here.
From media reports and the announcement, it would appear that the motivation behind Air NZ’s sale was twofold:
- Air NZ needs to free up the capital to battle intense competition in its domestic market and pursue its own growth opportunities
- Air NZ was becoming increasingly frustrated with Virgin’s financial performance and was concerned about having to inject more equity as part of Virgin’s forthcoming capital structure review (to be completed in the coming months). It would also appear from media reports that both Etihad and Singapore Airlines remain relatively comfortable with their ownership stake in Virgin.
Air NZ’s announcement and the associated uncertainty around the ownership structure has triggered negative reactions from both rating agencies:
As a result of the news, Virgin bond prices have fallen by around USD1 and the bonds are currently indicatively offered at a yield to maturity of 8.04%. We would expect further price falls if the bonds are downgraded, however at this stage we see a more likely scenario being that an alternative airline or the Virgin Group acquires some or all of Air NZ stake in Virgin which we would consider credit neutral.