Virgin Australia's biggest shareholders have passed up a deal to tip in fresh funds and recapitalise the airline, opening up the equity search to outside investors.It is understood Virgin started its equity search with the five shareholders, who together own more than 90 per cent of the airline's shares on issue.
The five shareholders were invited into the data room and shown a deal that would've seen them lead the looming and necessary financial restructure
The equity injection would've happened at the same time as lenders took a steep haircut, and required the existing shareholders to re-invest in the company to retain their place on Virgin's share register.
It is understood the due diligence process finished early this week - and it is at the stage where the five big shareholders have had to opt in or out.
Four of the five opted out, sources said, while the fifth was a "maybe".The four to opt out were Etihad Airways, Singapore Airlines, Nanshan Group and HNA Group, who together own 80 per cent of the company.
The "maybe" was Richard Branson's Virgin Group, whose attachment to the Australian business goes beyond its 10 per cent stake.
Being strategic investors, each has bigger problems closer to home. Airlines across the world have had to ground planes in response to the COVID-19 outbreak and are fighting for survival.
So Virgin's search moves to potential new investors - and it is understood to be particularly keen on Australian investors, in what would be a dramatic overhaul of its share register.
It remains to be seen whether any investors will take the bait. The equity search is running at the same time as a debt restructure, which would be expected to see the company's lenders take a big haircut on their investments.
It also comes as Virgin has gone to Canberra to seek its assistance. Virgin is seeking $1.4 billion in fresh funds, and asked the government to play a role in the mooted bail out.
The government piece is arguably the most material piece of information for any potential investors and has real implications for Virgin's restructure and the airline's future.
Should it all come together, Virgin may be able to avoid administration. If not, then it could become the next Arrium, and be auctioned off to the highest bidder and proceeds handed to creditors by order of seniority.
Equity holders are expected to be wiped out, whichever way the deal goes. The five strategic investors account for about 90 per cent of the share register.
Virgin shares are in a trading halt while the deal plays out. Morgan Stanley and UBS are managing the data room, while restructuring specialist Houlihan Lokey handles the debt side of the equation.
It had $4.8 billion in interest bearing liabilities at December 31 and $900 million in unrestricted cash and short term investments. Its next debt maturity is a $US350 million bond due in October 2021.
The $4.8 billion interest bearing liabilities included $1.8 billion in unsecured bonds, $1.6 billion lease liabilities, $1.2 billion aeronautic finance facilities and $221 million in bank loans. The aeronautic finance facilities and bank loans were secured, according to the company's interim financial report.
The unsecured bonds include the $325 million retail notes and $US425 million institutional notes issued to buy back full control of Velocity Frequent Flyer late last year.
It's a very different capital structure to Arrium, which was the last big workout bankruptcy in Australia. Arrium failed owing more than $4 billion and each of the big four Australian banks were towards the top of the list of creditors.