Virgin Australia Holdings Downgraded To 'CCC' On Fleet Grounding; Placed On CreditWatch Developing

  • We believe Virgin Australia Holdings Ltd.'s cash outflow and liquidity pressures have intensified following its decision to temporarily ground 125 aircraft, reduce domestic capacity by 90%, as well as suspend international flights and Tigerair Australia in response to government-led COVID-19-related restrictions. The airline will also suspend certain supplier payments.
  • Although our analysis does not incorporate any extraordinary support from the Australian government, we believe that the government may have an incentive to support Australian carriers given the temporary nature of this crisis. The prospect of Virgin Australia receiving timely and coordinated shareholder support appears unlikely given that its shareholder airlines are experiencing financial challenges to varying degrees.
  • On March 26, 2020, S&P Global Ratings lowered its issuer credit rating on Virgin Australia to 'CCC' from 'B-', and lowered its related issue ratings on the airline's debt to 'CCC-' from 'CCC+'. At the same time, we placed all ratings on CreditWatch with developing implications. Recovery ratings on the debt remain unchanged at '5'.
  • The CreditWatch developing placement reflects our view that a default or distressed exchange appears increasingly likely over the next 12 months, absent timely government or other support and/or a swift reversal of the COVID-19 outbreak.
MELBOURNE (S&P Global Ratings) March 26, 2020—S&P Global Ratings today took the rating actions listed above.
We lowered our ratings on Virgin Australia to reflect our view that the company's cash outflow and liquidity pressures have intensified. This follows Virgin Australia's decision to temporarily ground 125 aircraft, reduce domestic capacity by 90%, as well as suspend international flights and Tigerair Australia in response to heightened government-led COVID-19-related restrictions. The airline will also defer certain supplier payments.
Despite management initiating decisive measures to preserve cash, we nevertheless believe the scale of the COVID-19 exogenous shock has created an immediate and sizable cash outflow. We estimate that up to half of Virgin Australia's operating costs are fixed and that a reduction in variable costs will not offset the collapse in revenue. In addition, the positive working capital benefit provided by forward bookings and the Velocity Frequent Flyer business is now likely to partially unwind. As a consequence, Virgin Australia's previous A$900 million unrestricted cash buffer is likely to materially reduce in the very near term.
The prospect of timely and coordinated equity support now appears unlikely. Virgin Australia is 90%-owned by Etihad Airways, Singapore Airlines, Nanshan Group, HNA Group, and Virgin Group. To varying extents, each shareholder is experiencing their own challenging industry conditions.
Our analysis does not incorporate any extraordinary support from the Australian government. Given the temporary nature of this crisis, we believe that the government may have an incentive to support Australian carriers. We note that the government has taken steps to waive aviation fuel excise, air navigation charges, and security fees. In addition, the government has made public statements signaling that it is carefully considering further support measures. We note that Virgin Australia currently employs about 10,000 people, although about 8,000 have recently been stood down.
In our opinion, Virgin Australia is fundamentally well managed and that the Australian domestic market dynamic is fundamentally sound. The airline has successfully repositioned itself as a full service carrier, has the youngest domestic fleet, a dual-brand strategy, and integrated frequent-flyer business. In our opinion, management has taken decisive action to improve the long-term viability of the airline, including resetting the cost base in loss-making parts of the business such as Tigerair Australia, as well as exiting underperforming international routes and operating bases. Absent the COVID-19 shock, we consider that management had appropriately focused its efforts on cash generation and maintained liquidity levels in line with most of its major Australian corporate and international airline peers'.
The CreditWatch developing placement reflects our view that a default or distressed exchange appears increasingly likely over the next 12 months, absent timely government, or other support, and/or a swift reversal of the COVID-19 outbreak.
We could lower the rating if Virgin Australia's liquidity deteriorates to such an extent that a default or distressed exchange eventuates or appears almost certain.

Conversely, we could raise the rating if the Australian government or other parties provide timely financial support that buttresses the group's liquidity or there is a reversal of the COVID-19 outbreak to the extent that domestic passenger volumes swiftly recover.
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