Grounded airline Virgin Australia is considering going into administration as it races against time to get out from under a $4.8bn debt pile.
Amid calls from the federal opposition leader, Anthony Albanese, for the government to rescue the airline, it has hired insolvency and turnaround experts at Deloitte to work on restructure scenarios, Guardian Australia has learned.
It is believed that as part of the restructuring effort Virgin Australia has also hired the debt expert Jim McKnight of the investment bank Houlihan Lokey, who has worked on some of Australia’s biggest corporate collapses and rescues including the shopping centre empire Centro, toll road company BrisConnections and Network Ten.
Virgin Australia went into a trading halt on Tuesday morning after the Australian reported it had hired Houlihan Lokey.
In a statement to the stock exchange the airline said it “continues to consider the issues brought about by the Covid-19 crisis including discussions with respect to financial assistance and restructuring alternatives which are ongoing”.
It is believed administration, under which control of the company would be handed to insolvency experts, is at one end of the range of options being considered by Virgin Australia.
Administrators have powers not available to company directors, including the ability to force all creditors to take a haircut under a deed of company arrangement. Administrators are also able to disclaim uneconomic contracts, freeing the company from onerous obligations.
To succeed, a deed of company arrangement requires support from half the creditors, by number and amount owed.
Deloitte and Virgin Australia declined to comment. McKnight could not be reached.
Virgin Australia has asked for a $1.4bn loan from the government as part of a proposed broader $5bn airline industry bailout, but so far the deputy prime minister and transport minister, Michael McCormack, has resisted calls to prop up the sector through a direct cash injection.
On Tuesday the treasurer, Josh Frydenberg, said both Virgin Australia and Qantas had “substantial shareholders” – a reference, in Virgin Australia’s case, to Singapore Airlines, the Chinese state-owned group HNA and Etihad, which is owned by Abu Dhabi.
He said the government was “absolutely committed to the aviation sector”, pointing to a $1bn support package it has already announced.
However, airline sources say the package does little to help because $700m of it is made up of waivers of fees that are not charged when planes are grounded.
Airline industry sources said the sector is hopeful the government will fund key domestic routes, which have become unprofitable because planes are about 30% full.
It is understood the government is looking at providing additional support worth tens of millions of dollars for Virgin and Qantas, in order to ensure secure and affordable access for passengers and freight on essential domestic air routes.
There has also been speculation in government circles that a foreign airline might swoop on Virgin Australia.
On Tuesday, Albanese dismissed this idea as unrealistic and said that if Australia was going to lose the two-airline model, the government should intervene.
“The idea that Virgin can disappear and someone will just come in and pick up what’s left is just a triumph of hope over reality, which is why people in the government are talking about opening up Australian domestic routes to foreign carriers, which would carry foreign crew and pay foreign wages.”
Asked whether any mooted assistance should be available to other airlines, Albanese said it was Virgin that needed support now, but the point was to bolster the industry as a whole.
“This isn’t about favouring one airline or another. This is about favouring an industry structure that serves the national interest.”
But Albanese said taxpayer money should not be given unconditionally. He said Labor was flexible about the structure of the support, but there was no reason the government could not make a financial injection through equity with the ability to sell that stake down the track.
“This is an ideal time – if anything this is the bottom of the market, that’s for sure,” Albanese said.
The head of the Australian Competition and Consumer Commission, Rod Sims, has also insisted Australia needs new two airlines, and has launched an investigation into attacks on Virgin Australia by Qantas and its chief executive, Alan Joyce.
Since the outbreak of the coronavirus pandemic financial markets have become increasingly nervous about Virgin Australia’s financial stability.
The company has been in the red every year for the past five years, running up losses of more than $1.6bn. It lost an additional $88m in the six months to the end of the year.
Of the $4.8m the airline owes to its banks, $540m needs to be repaid or refinanced before the end of this calendar year.
At the start of the year Virgin Australia had $900m in free cash, but has continued to burn money despite grounding its fleet.
Its ability to raise more money by borrowing against its planes, as Qantas has done, is restricted.
As of the middle of last year, it had already borrowed $2.3bn against $3bn in planes, and industry sources say the value of the craft will have declined due to the pandemic, making further lending less likely.
Included in the mountain of debt is $700m owed to investors in junk bonds that pay a high interest rate of 8%, issued to fund the takeover of the company’s frequent flyer program, Velocity.
The bonds, issued in November at a face value of $100, last changed hands on Friday for just $39, indicating that traders believe the risk of default is very high.
