Virgin Australia's new Chinese suitors welcomed with cash call

[SYDNEY] Virgin Australia Holdings Ltd, backed by five airlines, asked its shareholders for A$852 million (S$851.5 million) in fresh capital, just days after two Chinese conglomerates agreed to buy almost a third of the company.

The Brisbane-based carrier plans to sell new stock at 21 Australian cents apiece for every share already owned, a 29 per cent discount to yesterday's closing price, it said in a statement Wednesday.

It's Virgin Australia's second cash call in less than three years and the airline's stock tumbled in Sydney.

The demand for new capital has split major investors between old and new. While China's HNA Group and Nanshan Group are among those taking up their allocations, Etihad Airways PJSC has yet to decide. Air New Zealand Ltd, once Virgin Australia's largest shareholder, last week agreed to sell most of its stake to one of the Chinese buyers.

Singapore Airlines Ltd and Richard Branson's Virgin Group are also taking up their Virgin Australia stock entitlements.

Dominated domestically by Qantas Airways Ltd, Virgin Australia has generated negative returns on equity in four of the past five years and had net debt of A$2.1 billion at the end of 2015.

After years of funding growth with borrowings, chief executive officer John Borghetti plans to trim its fleet and cut costs in a bid to generate free cash flow in the year ending June 2019.

"It certainly hasn't been a great reign but you could make a case that not all factors were under his control," said Angus Nicholson, a market analyst at IG Ltd in Melbourne. "It's been a difficult period for Virgin but at least he's got a three-year plan. Once you've committed to a plan you've got to see it out."

Virgin Australia shares fell 13 per cent to 25.75 Australian cents as of 12:26 pm in Sydney, extending the declines this year to 43 per cent.

The rights issue was larger than some analysts expected. Morgan Stanley had estimated Virgin Australia needed A$700 million in extra capital.

"It's now time to address that debt issue and deleverage the balance sheet," Mr Borghetti said in a phone interview Wednesday. Major shareholders want him to remain in his role, he said.

The rights issue follows a three-month capital review by Virgin Australia, which even had to borrow A$425 million from shareholders to see it through the assessment period. Some of the proceeds of today's capital raising will be used to repay that loan, Mr Borghetti said.

Virgin Australia will get rid of as many as six of its 14 ATR aircraft and all 13 of its Embraer E190 fleet over the next three years, it said. It outlined a range of measures - touching everything from ground operations to catering - that it said would improve efficiency.

Yet the program will run up restructuring and impairment costs of as much as A$450 million by June 2019, the airline said. Together with the A$425 million loan repayment to major shareholders, that's enough to swallow all the newly raised capital.

HNA, the owner of Hainan Airlines Co, last month said it plans to buy 13 per cent of Virgin Australia in new stock as it struck a code-share alliance with the airline. Nanshan is buying about a 20 per cent stake from Air New Zealand.

Virgin said Wednesday it will also issue additional new shares to HNA at 26 cents each - for a total investment of no more than US$300 million - to take the Chinese investor's stake to 19.99 per cent.

Singapore Airlines is buying the new shares "to ensure that its stake in Virgin Australia is not significantly diluted," it said in a separate statement. "The company is confident of the long- term prospects of Virgin Australia and is committed to supporting its long-term growth."

BLOOMBERG