Credit rating now downgraded to junk status.
https://www.fitchratings.com/researc...ues-17-04-2020
Fitch Ratings - Sydney - 17 Apr 2020: Fitch Ratings has downgraded Virgin Australia Holdings Limited's (VAH) Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'CCC-' from 'B-' due to the increasing uncertainty around whether the airline will be able to obtain additional financing to ensure it has sufficient liquidity while the coronavirus-related travel restrictions in Australia remain in place. The rating is removed from Rating Watch Negative (RWN), on which it was placed on 26 March 2020.The rating action follows the company's announcement that it is in discussions on restructuring alternatives. While Fitch believes that the company continues to work on financial assistance, we believe that travel curbs to contain the COVID-19 pandemic are increasingly straining its liquidity such that default is a real possibility.
VAH's working capital is increasingly being affected by cancellations, minimal bookings and outflows at its loyalty programme as members redeem points for non-flight benefits. The airline has now grounded most of its fleet to minimise cash outflows, but it is seeking options to shore up its liquidity. VAH's ability to secure this funding is important to maintain its viability.
Fitch believes the measures VAH took to ground its entire domestic fleet and run only the government-subsidised minimum domestic network will help the airline preserve cash flows. However, we believe the airline will run out of liquidity over the next six months without fresh third-party support. It remains uncertain when the travel restrictions will be lifted, and the time it will take for consumers to return to travel and VAH's operations to return to normal.
KEY RATING DRIVERS
COVID-19-Related Impact: Liquidity stress has been amplified as all non-essential travel between cities in Australia is effectively prohibited. VAH has suspended international operations and all domestic flights, except for the government-subsidised minimum domestic network. We expect cash-flow generation to fall significantly in the financial year ending June 2020 (FY20), and continue into at least 1HFY21. As a result, we believe that VAH will require fresh third-party financial support to ensure its survival during the travel restrictions and the aftermath once they are lifted.
Liquidity Pressure & Restructuring: VAH says that it remains in discussions on financial assistance. Fitch believes debt restructuring is a possibility unless VAH is able to obtain additional funding or some form of financial assistance from the government or another party. Fitch expects VAH to experience significant working-capital outflows for the remainder of FY20 as customers seek refunds and bookings fall sharply, and there are outflows for aircraft rent, staff costs, frequent-flyer point redemptions and other charges.
In our view, without additional funding over the next few months, there is a high chance that the airline will not be able to survive the impact of the COVID-19 shut down. We believe the government's relief package announced in March 2020, which provides refunds of airport charges incurred since February 2020, provides little support past FY20 given the grounding of most of VAH's fleet. Further, the government's announcement that it will subsidise a minimum domestic network from April to June 2020 will also provide little liquidity relief for the airline above what it could save with the grounding of its fleet.
Coronavirus Assumptions: Fitch now forecasts VAH's domestic capacity to fall by 100% for the rest of FY20, before recovering gradually from August 2020. We believe the government subsidies for flights will be, on the whole, earnings neutral and have not incorporated their effect into our forecast. We assume VAH's revenue passenger kilometres (RPK) and available seat kilometres (ASK) to gradually recover to close to our previous estimates by FY22. We believe that the coronavirus-related curbs in Australia will continue to have a strong impact on travel throughout FY21, although domestic travel may slowly resume over the next couple of months.
VAH's earliest debt maturity is USD350 million in October 2021, however the company is unlikely to be in a position to meet its debt service requirements beyond September 2020 without additional funding.
Limited Levers, but Lasting Impact: VAH has options available that we have not specifically incorporated into our short-term liquidity forecasts, including handing back leased aircraft and selling or borrowing against owned aircraft. We believe these measures, which would have a lasting impact and affect VAH's ability to recover, would be VAH's last line of defence. In addition, we have not included any potential further relief from the government to the aviation sector in our forecasts.