Coronavirus: Virgin Atlantic targets £900m rescue deal within days

Virgin Atlantic Airways is racing to stitch together a £900m privately funded rescue deal within days after concluding that it was unlikely to secure an emergency government bailout.

Sky News can reveal that the airline founded by Sir Richard Branson in 1984 has substantially increased the size of its proposed refinancing amid forecasts of a protracted post-coronavirus recovery for the aviation industry.

City sources said that Virgin Atlantic, led by chief executive Shai Weiss, was now targeting an overall package of at least £800m and potentially as much as £900m, as talks with a wide range of stakeholders continue through the weekend.

An insider said the discussions were now focused on "an informal deadline" in early July to have the outline of an agreement in place.

If agreed, the refinancing would aim to provide the carrier with a comprehensive re-engineering of its balance sheet to enable it to survive even the direst of predictions about global aviation demand.

Much of the total value of the package would not be new capital injected into the business, but would help Virgin Atlantic's stalling cashflow by deferring fees and other payments owed by the company.

Under the plans - which sources cautioned remained fluid and subject to substantial changes - Sir Richard's Virgin Group and Delta Air Lines, Virgin Atlantic's existing shareholders would provide around £250m of new funding support to Virgin Atlantic.

This weekend, two proposals from rival hedge funds Davidson Kempner Capital Management and Elliott to provide up to £250m in debt funding to the British carrier are being considered.

Elliott's offer is understood to be supported by Greybull Capital, the former owner of Monarch Airlines.

A source close to Virgin Atlantic's lenders said one of the hedge fund bids was likely to be chosen by the carrier's board as its preferred funding partner during the course of next week.

Davidson Kempner, an investor in British companies such as the outsourcer Interserve and Oak Furnitureland, is said to be a marginal frontrunner at this stage.

Any such deal would not dilute Virgin Group's 51% stake in the company.

The rescue package would also include several hundred million pounds of support from aircraft lessors and credit card companies, with talks about their support intensifying in the last few days.

The Civil Aviation Authority, the industry regulator, has also been asked to temporarily ease requirements relating to Virgin Atlantic's ATOL bonding arrangements.

Approval is also needed from a syndicate of bondholders which lent money to it in 2015 against its take-off and landing slots at Heathrow.

If the deal is successfully stitched together, it would also include an 'amend-and-extend' agreement with the providers of the airline's revolving credit facility.

The government has not formally ruled out providing funding or financial guarantees to Virgin Atlantic, but sources say the company has been proceeding for several weeks on the basis that no such support would materialise, and has focused on a private solution.

Rishi Sunak, the chancellor, indicated in April that state aid would be available to airlines "only as a last resort" and after the support of existing government schemes and companies' existing shareholders had been pursued.

The sheer multitude of stakeholders whose consent is needed for a rescue deal to be concluded underlines the fact that Virgin Atlantic's future is not yet assured.

Sky News revealed last month that the company's board had drafted in Alvarez & Marsal (A&M) to draw up contingency plans for a pre-pack administration or another form of insolvency arrangement.

Negotiations are nevertheless understood to be proceeding constructively, raising hopes that Virgin Atlantic's future can be successfully secured early next month.

Last month, the airline announced a restructuring of its operations designed to save hundreds of millions of pounds annually.

It is cutting 3150 jobs - almost a third of its workforce - and ceasing flights from London's Gatwick Airport, concentrating future UK flights at Heathrow and Manchester.

Virgin Atlantic is also cutting the size of its fleet and retiring older planes including its Boeing 747s.

British-based airlines have been pressing the government to introduce so-called 'air bridges' to mitigate the impact of the 14-day quarantine rule introduced this month.

An announcement next week is expected to provide limited relief to airlines on such travel corridors, but will fall well short of a wholesale return to normality.

EasyJet, International Airlines Group and Ryanair have begun legal action against the government aimed at overturning the policy.

Sir Richard's carrier has said it will aim to resume passenger flights on July 20 to destinations including Hong Kong, Los Angeles and New York, although Delta has warned that the recovery of demand for international travel is likely to lag domestic US aviation by a year.

There also remains uncertainty about the possible imposition of further restrictions by authorities in the US and elsewhere.

Virgin Atlantic is anticipating that customer demand will be at least 40% lower during 2020, with only a gradual recovery next year, reinforcing its desire to seek substantially more than its initial funding requirement of about £500m.

Although he pleaded for government support at the start of the COVID-19 crisis, Sir Richard has put himself into a position to contribute to the bailout of his flagship company.

The Virgin Group tycoon has raised roughly $500m by selling shares in Virgin Galactic, his space tourism venture, with the proceeds of those disposals to be injected into his airlines and other leisure and travel ventures.

This week, Bain Capital, the private equity group which is Sir Richard's partner in Virgin Voyages, won an auction to buy Virgin Australia, which had collapsed into insolvency proceedings.

Virgin is expected to invest in that refinancing.

People close to Virgin Atlantic have sought to contrast the handling of its workforce restructuring with that of British Airways, which has sparked volcanic fury from politicians and trade unions over its plans to sack 12,000 staff and amend the pay and conditions of remaining employees.

"This crisis has highlighted more than ever why Heathrow and British aviation needs a second strong player to challenge BA," one source said.

If the rescue talks fail to result in a solvent deal, an administration process would impact Virgin Atlantic's current borrowing arrangements and complicate its attempts to continue flying because of the conditions of its CAA and ATOL licences.

Its aircraft leasing and take-off and landing slot agreements would also be terminated by it falling into insolvency.

Since the coronavirus outbreak, Virgin Atlantic has furloughed thousands of staff and seen its top executives agree substantial pay cuts.

A handful of its planes have been flying since the UK lockdown began in March, largely on cargo routes.

Peter Norris, Virgin Group's chairman, urged Boris Johnson at the start of the crisis to establish an industry-wide support package that could cost in the region of £7.5bn.

Sir Richard recently made an impassioned defence of his group's financial affairs, warning that the transatlantic airline he founded in the 1980s was likely to collapse without government support.

He said the pandemic was "the most significant crisis the world has experienced in my lifetime".

"There are more than 70,000 people across 35 countries who work in Virgin companies, all of whom have been deeply affected by the pandemic in different ways," he wrote.

"Because many of our businesses are in industries like travel, leisure and wellness, they are in a massive battle to survive and save jobs."

The tycoon added that an initial $250m investment was "likely just the start".

"The chances of securing widespread economic recovery will depend critically upon governments around the world successfully mobilising various newly announced support programmes, which in these unique circumstances will be essential to protect people's livelihoods," he wrote.

A multitude of advisers, including Houlihan Lokey, Alvarez & Marsal, Deloitte, Morgan Stanley and EY are working for various stakeholders on the Virgin Atlantic rescue deal.

Virgin Atlantic declined to comment on Saturday.