Virgin Australia's shareholders have been warned they'll get nothing from the sale of the airline to Bain Capital

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Virgin Australia’s shareholders – which include five significant foreign airline groups – have been warned they will receive nothing from the sale of the airline to US private equity group Bain Capital.

Administrators from Deloitte delivered the stark warning to the ASX on Tuesday – one day before Bain Capital and its representatives, led by Mike Murphy and ex-Jetstar boss Jayne Hrdlicka, take control of the airline and start to pay the bills.

“We do not expect there will be sufficient recoveries to repay creditors in full,” joint administrator Richard Hughes said in the ASX disclosure.

“On this basis … we declare that we have reasonable grounds to believe that there is no likelihood that shareholders of VAH will receive any distribution for their shares.”

The private equity firm signed a sale and implementation deed for the company with Deloitte on Friday, meaning the deal is all but guaranteed ahead of the second creditors’ meeting in mid-August.

It remains unclear how creditors will vote at that meeting with the sale all but wrapped up.

The 6000 bondholders that Virgin owes $2 billion are considering their options – including a legal challenge to the administrator’s decision – after Deloitte discarded their proposal for the company and who are now likely to see little return for their investment.

Airlines lose strategic Australian investment

The move to sideline shareholders will see a handful of retail and small investors lose money on paper.

More significantly, Virgin Australia’s offshore shareholders – Singapore Airlines, Etihad Airways, Chinese conglomerates HNA Group and Nanshan, plus Virgin Group – will lose their strategic investments in Australia entirely.

While some did not respond to questions from The Australian Financial Review – and Nanshan could not be reached for comment – sources close to several of these groups said this was the expected outcome.

Singapore Airlines would not comment on its finances due to commercial considerations, while recommitting itself to the Australian market.

“During this time we have worked very closely with our partners in Australia’s airline, tourism and business travel sectors to successfully deliver more options to our customers,” a Singapore Airlines spokesman said.

“We expect that to continue after the COVID-19 restrictions … on air travel are lifted. Our commercial agreements with Virgin Australia remain in place.”

Virgin Group said it remains interested in taking an equity stake and licensing its brand in the relaunched Virgin Australia. It will spend the next few weeks in discussions with Bain Capital to understand the buyout giant’s business plan before finalising any deal.

The five shareholders are also dealing with the continuing business pressures exerted by the COVID-19 pandemic, which has plunged the global aviation sector into turmoil.

Before Virgin Australia entered administration in late April, all refused opportunities to pump more capital into the ailing airline as they embarked on fundraising efforts to survive the crisis.

Throughout the coronavirus outbreak – which prompted Qantas’ decision to show 6000 staff the door last week – Singapore Airlines has already raised $S19 billion ($19.8 billion), and HNA Group has collapsed into state-controlled hands.

The pandemic proved the final nail in the coffin for Virgin Australia. Its balance sheet could not withstand the initial sharp downturn in demand, with the International Air Transport Association forecasting that demand for travel will not return to pre-pandemic levels until 2023.

This situation is one Bain Capital will have to come to grips with quickly.

Bondholders – advised by financial services company Faraday and lawyers from Corrs Chambers Westgarth – had lobbed a separate recapitalisation proposal for the airline, in which their debt would be converted to equity, Virgin relisted on the ASX, and about $1 billion injected into the business.

But administrators rejected this proposal, with lead administrator Vaughan Strawbridge telling bondholders the offer was limited compared with the other bids.

“We considered the Faraday proposal but could not take this forward due to its highly conditional nature, lack of certainty and no evidence of committed funding,” he said.

“It is our understanding that the significant capital injection required to fund the businesses and to pay any entitlements for staff who would, unfortunately, be made redundant through the process, would be funded from new funds raised from bondholders, including yourselves. We saw no evidence of any funds unconditionally committed for this purpose.”

Beating its competitor Cyrus Capital Partners with a pitch for a slimmed-down, mid-market Virgin, Bain Capital will halve the airline’s fleet and do away with VIP lounges and expensive food.

Ex-Jetstar boss Jayne Hrdlicka is likely to take a role at the relaunched airline, but Bain Capital has committed to keeping the current management team, led by chief executive Paul Scurrah, in place.

The private equity firm has promised to pay the $450 million in entitlements owed to workers, and to introduce an equity program for employees staying with the business, and retraining staff facing redundancy.

There are growing concerns among Virgin’s unions that Bain Capital will renege on these promises, with some fearing the private equity group is softening them up for a harsher approach to industrial relations than initially believed.

“Bain made important workforce commitments prior to its announcement as recommended bidder, and these must be honoured,” Transport Workers’ Union national secretary Michael Kaine said.

On Tuesday, experts predicted job losses at Virgin Australia could reach 5000 – about half of the airline’s existing staff – as the new owners try to rebuild its crisis-hit operations.

This story originally appeared in the Australian Financial Review. Read the original story here.

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