Thu 07/23/2020 07:46 AM
The ad hoc group of Virgin Australia bondholders headed by Broad Peak and Tor has converted a previous recapitalisation proposal to a DOCA proposal, and put it before the administrator Deloitte on July 20 for consideration before the creditors at the upcoming second creditors meeting, but is still pending a response from the administrator, said a source close to the situation.

The second creditors meeting is scheduled for Aug. 26, as reported.

As previously reported on June 26, key elements of the recapitalisation proposal included an A$125 million ($86.8 million) capital injection to the administrators and an around A$800 million new facility, potentially a convertible bond, to capitalise the airline including for working capital.

The proposal would see the airlines’ A$1.988 billion bond debt converted to equity in Virgin Australia, which would retain its ASX listing, and would have a market capitalisation of roughly A$1.4 billion, giving a recovery of around 70 cents on the dollar to bondholders, as reported.

To develop and finalise the DOCA proposal as an alternative to Bain's proposal, Tor and Broad Peak have requested access to stakeholders, including Virgin Australia management, leaders of unions, bank lenders, and lessors, arguing this access should be available in the same way as it was to Bain Capital, Cyrus Capital Management, and BGH Capital during the sale process.

The bondholders believe Deloitte granting permission to speak to stakeholders and share relevant information will ensure the final DOCA is unconditional, the source said.

Broad Peak and Tor - holders of around A$300 million of Virgin Australia’s unsecured notes - had previously sought to vary confidentiality orders over information, including the terms of Bain Capital’s proposed transaction for the airline, as they looked to develop an alternative DOCA to put before creditors at the second meeting of creditors scheduled for mid-August, as reported.

In dismissing the application, Justice Middleton of the Australian Federal Court in his judgment published July 15 cautioned that the Administrators will need to be “full and frank with the creditors” and provide sufficient information for them to make an informed decision on matters for resolution at the next creditors meeting.

Middleton noted that a creditor at the meeting needing more time or information could be a reason to adjourn the meeting, and that if sufficient information material to creditors reaching a decision on a proposed Deed of Company Arrangement (DOCA) is not made available, it could be ground for the Court later terminating the DOCA.

Neither of these scenarios is desirable, Middleton states in the judgment.

The ad hoc bondholder group is advised by Corrs Chambers Westgarth and Faraday Associates as legal and financial advisors, respectively, with Stinton Advisory engaged with the ad hoc group for stakeholder management, as reported.

Bondholders had first met and tabled an Expression of Interest in tabling a potential recapitalisation proposal in mid-May to Deloitte, and followed up at the end of May, to communicate that they would like to submit a formal recapitalisation proposal. That communication led to the ad hoc group being granted access to the data room, as reported.

The ad hoc recapitalisation proposal operated on the basis that the equity of the company has been effectively wiped out, and that bondholders are effective economic owners of Virgin Australia, said the source. Under a DOCA process, the administrator is required to approve a proposal which provides the best economic outcome for creditors, the source added.

Underpinning the proposal is the idea that Australia is emerging more rapidly from the Covid-19 pandemic than other economies, and that the aviation industry will recover as the country’s economy revives. Bondholders who convert their bonds to equity can cash out when the conversion takes effect, or hold the equity to benefit from an uptick in the economy over the longer term, as reported.

The idea is that bondholders had invested in the vision of new management for the airline, and would invest in management again through equity, and recapitalising the airline to allow management to follow its development plans, as reported.

Deloitte did not immediately respond to request for comment.

-- Stephen Aldred
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