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Virgin “increasingly likely” to run out of cash, no rescue in sight

Virgin Australia has been hit with more bad news after Standard & Poor’s warned that the likelihood of the company defaulting on its debt “appears increasingly likely over the next 12 months’’ and that it was likely to run out of cash.

Mar 27, 2020, updated Mar 27, 2020
A passenger is seen at the Virgin Australia terminal at the Brisbane Domestic Airport. Virgin Australia has announced it is standing down around 8,000 of its 10,000 workers and will be cutting its domestic capacity by 90 per cent. (AAP Image/Darren England) NO ARCHIVING

A passenger is seen at the Virgin Australia terminal at the Brisbane Domestic Airport. Virgin Australia has announced it is standing down around 8,000 of its 10,000 workers and will be cutting its domestic capacity by 90 per cent. (AAP Image/Darren England) NO ARCHIVING

It said the Brisbane company’s $900 million cash buffer “was likely to materially reduce’’ in the very near term.

According to S&P, Virgin could not expect any rescue from its major shareholders, all of whom are major airlines facing the same crisis as Virgin.

But it believes a government bailout of the airline industry made sense.

S&P downgraded Virgin’s debt to CCC and revised its liquidity to weak from adequate.

The credit ratings agency said Virgin’s cash outflow and liquidity pressures had intensified following its decision to temporarily ground 125 aircraft, reduce domestic capacity by 90 per cent, as well as suspend international flights and Tigerair Australia in response to government-led COVID-19-related restrictions.

“Despite management initiating decisive measures to preserve cash, we nevertheless believe the scale of the COVID-19 exogenous shock has created an immediate and sizable cash outflow,” it said.

“We estimate that up to half of Virgin Australia’s operating costs are fixed and that a reduction of variable costs will not offset the collapse in revenue.

“In addition, the positive working capital benefit provided by forward bookings and the Velocity Frequent Flyer business is now likely to partially unwind.

“As a consequence, Virgin Australia’s previous $900 million unrestricted cash buffer is likely to materially reduce in the very near term.

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“The prospect of timely and coordinated equity support now appears unlikely.

“Although our analysis does not incorporate any extraordinary support from the Australian Government, we believe that the Government may have an incentive to support Australian carriers given the temporary nature of this crisis.

“The ‘CreditWatch developing’ placement reflects our view that a default or distressed exchange appears increasingly likely over the next 12 months, absent timely government or other support and/or a swift reversal of the COVID-19 outbreak.

“In our opinion, Virgin Australia is fundamentally well managed and that the Australian domestic market dynamic is fundamentally sound.’’

 

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