Virgin has announced it is commencing a review of its capital structure. As part of its announcement, Virgin has secured AUD425m in additional funding from its four major shareholders in the form of a subordinated loan
Virgin has announced it is commencing a review of its capital structure (link to ASX announcement here). The review will include an assessment of the appropriate mix of debt and equity and operational initiatives to enhance cashflow and profitability.
As an initial step, Virgin has secured a new 12 month AUD425m subordinated loan facility from its four major shareholders (Air New Zealand, Etihad Airways, Singapore Airlines and the Virgin Group), ranking behind Virgin’s existing debt to provide additional flexibility in the short term. From a bondholder’s perspective, the subordinated loan can be effectively viewed as ‘quasi equity’ from the four major shareholders given it ranks behind Virgin’s existing debt.
Based on historical evidence, we see a reasonable chance that the shareholder loan will ultimately be taken out by an eventual equity raise – we note that Virgin secured a shareholder loan (AUD90m in August 2013) just prior to its last equity raise (AUD350m in November 2013).
Overall we see the announcement as positive news for Virgin’s credit profile. It shows the continuing support of Virgin’s four major shareholders, which has been a key consideration in our support of the Virgin bond. The subordinated loan also provides an additional source of liquidity to the business without adding to senior debt leverage.
We note there are no early call provisions on the USD bond, apart from a make whole provision which would make an early redemption prohibitively expensive. However, we don’t see any hurdles stopping Virgin from buying back or tendering its bonds if its sees them as an expensive source of funding.