Federal Treasurer Josh Frydenberg wants to maintain two airlines in Australia and could set the ball rolling by issuing $1.4 billion in convertible debt to Virgin Australia, convertible at $1, which would decimate shareholders.
The offer would need shareholder and bondholder support but would precipitate the change in ownership necessary to help the airline survive.
The proposal would wipe out shareholders’ equity but if the money was not repaid on time, and all going to plan, it would allow the government to sell its stake in the airline at - hopefully - a profit.
The proposal is not quite as simple as suggested because bondholders among its $5.1 billion in debt would also have a say.
The Virgin debt has a clause which requires it to be renegotiated if a new equity holder takes control, which means if the government was to take control it would also need to deal with the bondholders.
Existing shareholders don’t need to renegotiate the debt so if the dream deal happened and Singapore Airlines took control, bondholders would be sidelined.
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Troubled Virgin reduced to a wing and industry prayersThe suggestion comes as some confusion surrounds Deputy Prime Minister Michael McCormack’s suggestion he has given the airline industry $1 billion in support to manage through the shutdown of the industry.
None of this money promised last week has ended up in the industry’s hands except, it seems, $250 million which will go to Airservices Australia.
Airservices Australia is the government entity in charge of air traffic control and allied operations and the money will go to its account to compensate for the loss of revenue from the shutdown airlines.
The $720 million promised to the industry is in the form of discounts in charges which would have been, or were levied, since February.
The government will also set down the new routes applying under the shutdown, which will have Virgin and Qantas flying more than they do now on an underwritten basis. Currently
Virgin is flying just Melbourne to Sydney one day a week.
Qantas, which normally flies the route 48 times a week, will be down to five times a week, among services to other centres.
The services are designed to cover emergencies and will largely be carrying freight.
The five airlines which have invested in Virgin have already had the value of their investments cut but this will all but disappear under any bailout package.
By way of example Singapore Airlines entered the Virgin register in 2012 with a 10 per cent stake and in 2013 acquired another 10 per cent at 48 cents a share, or $126.6 million. This would value 20 per cent at $253.2 million.
Its 20 per cent stake is now worth $167 million and under the convertible note proposal it would be worth virtually zero.
Given equity holders face being wiped out under any survival package, they would probably support the debt package if it meant keeping Virgin afloat.
But given any deal would virtually wipe out their equity and none of the holders are flush with cash due to their own domestic pressures, a Singapore Airlines takeover may look like a better alternative.
The government would back the move, which would please the Singapore government-controlled airline.
But there are a few steps to walk before the transactions occur.