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Virgin Atlantic Declares Bankruptcy as Part of Restructuring
Virgin Atlantic filed for Chapter 15 bankruptcy in New York on Tuesday, becoming the latest airline — and the second from Virgin Group — to file for bankruptcy protection, Business Insider reports. Virgin Australia filed for voluntary administration in April.
Virgin Atlantic originally suspended passenger operations in April. It flies exclusively long-haul international routes, so it has faced tougher seas than other airlines as international travel has significantly declined and countries have increased travel restrictions. While both the U.S. and Europe have seen passenger counts increase since May, much of the recovery has been driven by domestic travel.
The airline began flying passengers again in July.
Soon after it stopped flying in April, Virgin Atlantic said it would cut over 3,000 jobs and close its base at London’s Gatwick airport, moving operations to Heathrow instead. That move allowed it to cut costs and consolidate operations, reducing the associated fees it needs to pay by having its aircraft based in more locations. The airline also retired its Boeing 747-400 fleet, a cost-cutting measure that allows it to fill more flights by cutting seats available.
The airline announced a 1.2 billion pound ($1.5 billion) private rescue package in July, but has so far failed to close the agreement. In announcing its bankruptcy, the carrier said it will effectively run out of money in September, when its available cash will drop below the 75 million pound minimum cash requirement specified in bondholder contracts. If that happens, Virgin Atlantic would be forced to sell slots at Heathrow, forcing it to shut down completely.
On Wednesday the airline released a statement on its Twitter account saying, “The chapter 15 filing in the United States is a procedural application to allow the U.S. courts to recognize the restructuring process we are undertaking – in this case, the solvent recapitalisation of the airline under English law. Once approved and implemented, our plan will keep Virgin Atlantic flying.”
“As a result of the Covid-19 pandemic, the group is now undergoing a liquidity crisis. Passenger demand has plummeted to a level that would, until recently, have been unthinkable,” said company lawyer David Allison in a prepared statement. “Absent a restructuring and an injection of new money, it is projected that the group’s cash flow would drop to a critical level by the week commencing 21 September 2020.”
“It is projected that the group would run out of money altogether during the week commencing 28 September 2020,” Allison added.
Virgin Atlantic also appealed for a government bailout but was denied due to low credit ratings. Delta Air Lines, which holds a 49% stake in the airline, has said it will not offer a cash injection to save Virgin Atlantic from bankruptcy proceedings.
The airline has obtained a court order to hold four meetings with creditors to vote on a restructuring plan that would bind all debt classes to its rescue plan. Creditors in three of the four groups have reportedly agreed in advance to back the airline.
A restructuring plan must be approved at a hearing scheduled for Sept. 2. If it is not, the carrier will go into administration in mid-September, and its assets will be sold.
“With support already secured from the majority of stakeholders, it’s expected that the restructuring plan and recapitalization will come into effect in September,” an airline spokesperson said, per Bloomberg. “We remain confident in the plan.”
U.S. hedge fund Davidson Kempner Capital Management will provide about 170 million pounds in secured financing, while group owner Richard Branson will offer 200 million pounds raised from Virgin Galactic. The airline’s rescue plan includes 450 million pounds of creditor deferrals and 400 million pounds of payment delays or waivers from Virgin Group and Delta.
In total, the bailout package is worth 1.2 billion pounds spread out over the next 18 months.
Bloomberg reports that Virgin has four main proposals for the creditor groups: a fully drawn $280 million revolving credit facility secured against aircraft and engines will become a term loan with a longer maturity and a margin that’s 1% higher with a single engine excluded to be used as security for a new $30 million facility; offering leasing firms that own Virgin aircraft a 15% cut in fees until September next year at least, an 80% reduction for the full term, or the termination of leases and the return of aircraft in their current condition; giving connected creditors preference shares in return for capitalization of money owned; and offering trade creditors a 20% haircut, with 10% of the remaining balance paid in cash and the rest in quarterly sums through September 2022.
“[Entering administration] would result in a poor outcome for the company’s creditors – especially its unsecured creditors – since the value of the company’s assets and business would likely be subject to a significant reduction in the event of a formal insolvency proceeding,” Allison said. “Such an outcome would be particularly unfortunate because the group’s business is fundamentally sound. The problems that the group now faces are not of its own making but are the result of a global health disaster.”
Chapter 15 bankruptcy is designed for cases that involve multiple countries. It allows companies entering bankruptcy proceedings in their own country to access the U.S. court system. In this case, Virgin Atlantic is using the system to protect its U.S. assets from creditors while a U.K. court will oversee claims.
“One of the most important goals of chapter 15 is to promote cooperation and communication between U.S. courts and parties of interest with foreign courts and parties of interest in cross-border cases,” the U.S. court system says on a website explaining the proceedings.
With the coronavirus continuing to spread throughout the world — and especially in the U.S. — Virgin Atlantic’s route network will likely look very different for some time. The carrier will be unable to maintain its former capacity, especially with tight travel restrictions to important markets like the U.S. in place. The airline will take longer than most to recover from the travel dropoff associated with the coronavirus pandemic because it does rely so much on international travel, which is expected to be the last facet of travel to recover from this crisis.
Considering that experts agree that it could take three to four years to recover to pre-pandemic flying levels, it may be a long while before Virgin Atlantic can get on stable footing once again. But the brand is lucky to be viewed in a positive, well-loved light, so many are likely to support the brand once travel abroad is safe.
This announcement comes soon before Virgin Australia, the other Virgin Group airline, is set to announce its own restructuring plan. That airline is set to be bought by Bain Capital after entering voluntary administration in April with $6.8 billion in debt. Virgin Australia is also expected to announce job losses as well as how its fleet and route network will change to save money, the Sydney Morning Herald reports.
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