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Virgin faces administration – what does it mean for shareholders?

Posted: 20 April 2020 8:53 pm
News

Virgin aircraft in Melbourne

Australia's second biggest carrier is set to become the pandemic's first high-profile victim.

Update: On Tuesday 21 April, Virgin Australia officially announced it's entering voluntary administration headed by Deloitte. Virgin said it will be looking to recapitalise as it continues to seek financial assistance.

Shareholders of Virgin Australia (VAH) will be on the edge of their seats Monday after reports began circulating that Virgin Australia's board members were meeting to discuss the fate of the company.

While no official announcement has been made, there are fears the company could enter voluntary administration as travel bans continue to weigh on the already indebted airliner.

Related: Australia’s travel stocks are in turmoil – are they a buy or too risky?

Virgin Australia – which is the country's second-biggest airline and parent company to Tigerair – has been in a trading halt since 14 April, pending a requested $1.4 billion bailout from the government and a restructuring announcement.

But reports from the AFR Monday confirmed those decisions might be coming to a conclusion, with financial assistance from the commonwealth unlikely to be forthcoming.

If the rumours are true, it will be the country's first high-profile corporate victim of the coronavirus lockdown.

Private bailout?

If the government does not bail Virgin out as reports suggest, some hope had initially been pinned on its major private shareholders.

Although originally a wholly-owned subsidiary of Richard Branson's Virgin Group, by late 2019, its majority shareholders comprised Etihad Airways, Singapore Airlines, Virgin Group and Chinese private conglomerates Nanshan Capital Holdings and HNA Group.

Just 10% of the company is owned by public shareholders.

However, it would be unusual for a private shareholder to bail out an airline. Besides which, Virgin Group, Etihad and Singapore Airlines will all be facing their own challenges amid the ongoing pandemic crisis.

What happens to stocks during voluntary administration?

It's the scenario every shareholder fears and one of the reasons stocks can be riskier than other kinds of investments.

Administration does not necessarily mean the company will cease to exist, however a likely scenario is that VAH shareholders will find their holdings dwindle to $0.

Note: Finder has reached out to Virgin's investor relations team for further clarification around this but have yet to hear back.

When a company enters liquidation, its first duty is to its creditors – while shareholders are among the last to be paid.

Because Virgin Australia holds around $5 billion in debt, there's a good chance there will be nothing left for shareholders to take home.

As such, shareholders have no voting rights during the administration process.

On the other hand, shareholders of main rival Qantas could find themselves in a nice little position if the airline lands itself a monopoly on Australia's market.

Virgin is expected to make an official announcement Tuesday. More to come.

Plus: What happens to my booked flights and Velocity Points? All your questions answered.

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