London-based Virgin Atlantic has filed for Chapter 15 bankruptcy in the Southern District of New York, allowing U.S. courts to recognize and implement the airline’s restructuring that is proceeding in the U.K.
In its filing it stated its runway ends in September without a new injection of funds. That’s when the airline projects to drain down to $64 million in cash, below the $98 million required by convenants in debt instruments that could allow its lenders to force the carrier to sell its landing slots at London Heathrow to repay debt and effectively end the business.
A cash injection is waiting on the sidelines, a $1.5 billion package was announced in July but is pending renegotiation of aircraft leases and prior debt. About $222 million can be accessed as soon as the airline’s reorganization plan is approved.
While no additional funds come directly from 49% owner Delta – which faces constraints having taken its own U.S. government bailout and with its CEO Ed Bastian stumping for another round of government payroll support – the bulk of the rescue is in the form of deferral of payments by Branson and Delta. (Yes, this is an end run and effectively has a government bailed-out U.S. airline bail out out a U.K. carrier by taking debt-as-equity in lieu of cash.)
Virgin Atlantic will hold four creditor meetings on August 25, and indicates that three of the four groups needed to vote for restructuring have already agreed to do so. The plan is set for approval on September 2.
Here’s the crux of the plan for each of the four creditor groups:
- $280 million revolving credit secured by aircraft and engines becomes a long-term loan at 1% higher interest with an engine released to securitize a new $30 million loan.
- Aircraft lessors can choose lower lease payments or termination of leases
- Delta gets preferred shares in exchange for funds owed
- Suppliers take less money and payments in quarterly installments for two years though airports and other critical supplies are exempted from the haircut.
Copyright: boarding1now / 123RF Stock Photo
As long as the restructuring is approved, miles are safe – and it seems likely that creditors will approve because in the current environment the value of collateral is likely depressed and liquidation of the carrier isn’t likely to secure greater repayment. Put another way, you want to sell Heathrow slots when they’re worth more, not when they’re likely to secure their lowest prices in years. This assumes, however, that creditors act in what appears to be their long-term interest.