Sale of Virgin Australia Stake to Nanshan Is Credit Positive

Air New Zealand’s Sale of Virgin Australia Stake to Nanshan Is Credit Positive

Ian Chitterer, Vice President - Senior Analyst, Corporate Finance Group, Moody's Investors Service Pty. Ltd.

** Below is an article from "Moody’s Credit Outlook", 13 Jun, 2016 issue.

Last Friday, Air New Zealand Limited (Baa2 stable) announced a sale and purchase agreement with Nanshan Group (unrated) for its 19.98% stake in Virgin Australia Holdings Limited (B2 review for downgrade), pending the approval of China’s regulatory authorities. The agreement is credit positive for Virgin because it resolves uncertainty about the company’s key shareholders, which has impeded Virgin’s capital structure review and balance sheet strengthening that were announced 21 March.

As Virgin’s largest shareholder, Air New Zealand’s 30 March announcement that it would explore options for its Virgin stake, including a possible sale of part or all of its stake created uncertainty. Air New Zealand’s announcement on Friday stated that Nanshan intends to add its share of required capital at the conclusion of Virgin’s capital structure review. Nanshan will purchase the stake for AUD159 million, or AUD0.33 a share, a 10% premium to the AUD0.30 a share that China-based HNA Aviation Group Co. Ltd (unrated) agreed to pay 10 days earlier for a 13% stake in Virgin, pending regulatory approval. Nanshan will nominate a board representative, which Virgin will consider in line with its corporate governance procedures and policies.

Nanshan is a large privately owned Chinese conglomerate with interests across a diverse range of industries, including its own emerging airline in China, Qingdao Airlines, which was launched in April 2014. Nanshan does not bring the same strategic and operational benefits to Virgin as the HNA tie-up because HNA operates a number of airlines, including Grand China Airlines and Hainan Airlines, and intends to increase its stake to as much as 19.99% over time. With HNA, Virgin will gain greater access to China’s growing travel market, where HNA has an established position as the largest private operator of airlines, while the equity injection comes as Virgin endeavors to strengthen its balance sheet. However, Nanshan’s willingness to support the outcome of Virgin’s capital structure review is clearly positive.

Based on Virgin’s weakening liquidity amid adverse working capital movement, high capital expenses for the first half of the fiscal year that ended March 2016, and its considerable US dollar-denominated debt, which has kept rising in Australian dollar terms because of the weakness in the local currency, we expect Virgin’s adjusted debt/EBITDA to remain within 6.5x-6.8x at 30 June 2016, versus our quantitative guidance of below 6.5x for the B2 rating. If HNA’s AUD159 million equity injection is applied to debt repayment, we expect adjusted debt/EBITDA to improve to 6.4x-6.6x.

To date, Virgin’s credit quality and rating have benefited from its strong shareholders, which have provided liquidity and capital support in the past, increasing our tolerance for the company’s weak leverage metrics relative to our expectations for its B2 rating. If, as a consequence of Virgin’s review of its capital structure, its financial metrics improve to below the stipulated guidance of 6.5x for the B2 rating, we would likely affirm the rating.

ends

© Scoop Media