EMEA Restructuring: Virgin Atlantic’s £1.2bn restructuring

IFR Awards 2020
3 min read
Sandrine Bradley

Up, up and away

In April, Virgin Atlantic, founded by Richard Branson, knew it had a problem. The Covid-19 pandemic left it looking at a staggering 98% drop in flight volumes for the second quarter. A liquidity crisis was emerging that could see cash levels breach the minimum threshold needed to keep operating by September.

Initially Branson said the airline, still 51% owned by his Virgin Group with US carrier Delta holding the remaining 49%, might only survive with government support. Houlihan Lokey was hired as financial adviser to the company.

“It was one of the most complicated deals we have ever had to do in such a short space of time. We had five months to get a deal done – we had no choice on that,” said Joe Swanson, co-head of EMEA restructuring at Houlihan Lokey. “They were running out of money and under extreme pressure from the impact of Covid.”

But by July the company had managed to agree a £1.2bn recapitalisation with shareholders and a majority of creditors, and, unlike many peers, without resorting to public funding.

Virgin Group invested £200m as part of a support package from shareholders. Davidson Kempner Capital Management came in to provide £170m of additional new secured financing. Creditors also agreed to defer repayments on more than £450m of liabilities mainly to 2025.

The financial deal was struck as the operator simultaneously set out a new business plan that will see £280m in annual cost savings and an £880m reduction in capital expenditure on its fleet over the next five years.

“We had to put together an operational and financial restructuring plan that would prove to shareholders that the business was sustainable,” said Swanson. “This gives the airline a clean runway.”

Getting the deal swiftly implemented was contingent on the consensual agreement of all creditors. That included trade creditors, who are not normally included in debt restructuring processes since debtors do not want to risk damaging important supply chains.

Against this backdrop the company and its advisers decided to become the first debtor to test the UK’s new restructuring plan procedure, which had only been introduced in June as part of an overhaul of insolvency laws.

Under this new system, unlike schemes of arrangement that are commonly used in the UK, a dissenting class could now be crammed down and forced to accept a deal by the majority of creditors. Using it for the first time in such a delicate situation was a major risk. There was no precedent for how UK courts would interpret the new process.

But ultimately the mere existence of this new weapon was enough for Virgin Atlantic to reach agreement with its trade creditors before it had to be tested. The cramdown was not needed and the plan was sanctioned by the court on September 2.

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