Virgin Australia has bought itself more time to fix its ailing balance sheet after obtaining a 12-month, $425 million unsecured loan from its four major shareholders, Air New Zealand, Etihad Airways, Singapore Airlines and Virgin Group.
The move, foreshadowed by The Australian Financial Review's Due Diligence column on Monday, comes as part of a broader review of Virgin's capital structure.
Virgin navigates through balance sheet turbulence
Investment involved in Virgin's big push into the business market leaves its balance sheet in something of a weakened space.
The airline took out a $US125 million ($164 million) loan in the first half of the financial year amid a decline in its unrestricted cash balance to $544 million, from $839 million a year earlier.
Analysts said the carrier had been hampered by its inability to receive the full benefits of the fall in the oil price due to its hedging strategy, as well as its high US-dollar debt load at a time when the Australian dollar has weakened. In addition, while domestic market conditions have improved, the airline's international business has been losing money.
Before Virgin's half-year results, consensus forecasts were for it to report a full-year underlying profit before tax of $143.4 million, but that was revised down to $108.6 million after the interim results.
Virgin chairman Elizabeth Bryan said the board was focused on "optimising" the company's balance sheet and capital structure after having completed a major transformation of the carrier during the past six years.
"The group has secured loan facilities from its major shareholders that provide a flexible source of funding while the review is undertaken," she said.
Virgin shares rebounded to close 3¢ higher at 38¢ on Monday after having fallen 5¢ to 35¢ on Friday when some investors feared an equity raising was imminent.
The review will include an assessment of the appropriate mix of debt and equity capital and operational initiatives to improve cash flow and profitability. Rival Qantas Airways is much more profitable than Virgin, even accounting for the difference in size between the carriers.
"Importantly, the clear message from today's announcement is that any additional equity would be used to reduce gearing, unlike the last time Virgin raised equity [in 2013], which was to grow market share," Macquarie Equities analyst Sam Dobson said.
Mr Dobson estimated the airline would need to raise $560 million in equity – including funds needed to repay the loan – to meet its financial leverage target for the 2017 financial year.
"Alternatively, should Virgin be able to accelerate its cost-cutting program in FY17, this would obviously reduce the equity requirement," he said.
Australian Shareholders Association director Geoffrey Bowd said he believed the shareholder loan was an appropriate way for Virgin to gain some "breathing space" with its balance sheet.
"It is a vote of confidence from their four major shareholders," he said.
But Mr Bowd added that if Virgin chose to raise equity in the future, it should pursue a renounceable rights issue to be fair to all shareholders rather than the non-renounceable structure it used for a $350 million raising in 2013.
One analyst said it remained possible that Virgin's largest shareholders would seek to take the airline private as a result of the review.
"You wouldn't have to pay too much of a premium to get the existing minorities out now," the analyst said.
The airline did not provide a timeframe for when the review of its balance sheet would be completed. It also did not reveal whether the $425 million loan, provided on arm's-length commercial terms, would be put towards repaying debt. The loan commitments are proportional to the stake each shareholder holds. Combined, the four shareholders have an 84 per cent stake in Virgin.
The interest rate on the loan, and whether it was lower than the 8.5 per cent coupon on its high-yield US-dollar bonds, was not revealed. It is understood the loan cannot convert to equity.
Air NZ, Etihad and Singapore Airlines had previously provided Virgin with a $90 million line of credit in August 2013, but that was quickly repaid by a $350 million capital raising announced in November that year.
Since the end of a capacity war against Qantas, Virgin has reported a rise in average fares but a decline in passenger numbers in the domestic market.
In the first half of the financial year, Virgin filled 76.2 per cent of domestic mainline seats, compared with 78.5 per cent two years earlier. In contrast, Qantas filled 76.5 per cent of seats in the first half, up from 74.9 per cent two years earlier.
In the first half, Virgin's mainline capacity was 0.1 per cent higher than it was during the height of the capacity war two years earlier, while Qantas had trimmed mainline capacity 3.6 per cent during the same period.
Meanwhile, Jetstar's capacity was 5.9 per cent higher and Tigerair Australia's was 25.4 per cent higher during the past two years. Jetstar filled 84.9 per cent of seats in the first half, up from 82.3 per cent two years earlier, and Tigerair filled 86.1 per cent of seats, down from 88 per cent two years earlier.