Is voluntary administration the end for Virgin or a way to a new beginning?

Much has been written in the past few weeks about the impact of COVID-19 on the Australian economy and Virgin Australia has been at the forefront of these headlines as Australia’s second domestic carrier.

What will it mean for Australian travellers if there is only one airline to service the local market?

This week Virgin Australia Holdings was placed into voluntary administration by the board, with Vaughan Strawbridge, John Greig, Sal Algeri and Richard Hughes of Deloitte appointed as administrators of Virgin and a number of its subsidiaries.

Speculation was strong on social media that this was the end of Virgin in Australia. But it’s more likely the voluntary administration process will result in a stronger, more viable version of the airline flying in the future.

So, what exactly is voluntary administration?

Voluntary administration is a process whereby an external administrator is appointed to oversee the operation of the company. While in administration, the company is afforded certain protections that will allow it to continue operating where it otherwise may not have. The administrator’s role is to assess the ongoing viability of the business and seek out opportunities to repair the business in the short term.

Companies that go into voluntary administration often have significant debt loads, significant creditor balances or have been significantly impacted in their business operations (or a combination of all these things). The administrators will seek to find investors who may wish to recapitalise and restructure the company going forward.

If an investor can be identified, the administrators may seek to enter into a deed of company arrangement (DOCA) whereby the investor makes an offer to invest in return for creditors accepting (in most cases) a proportional offer for outstanding liabilities.

For example, in the case of Virgin, this may mean an offer to purchase the debt from the existing lenders at a discount or to settle with secured and unsecured creditors at a discount. It may also include renegotiation of leases over planes and equipment.

An investor in the new Virgin would then be taking on a company with lower debt and liabilities and potentially more favorable lease terms. This may allow Virgin Australia to continue flying as Australia’s second carrier with a much healthier balance sheet and business prospects.

The process of voluntary administration may also result in a negative outcome. If a new investor cannot be found or the terms of the offer by the new investor are not accepted by creditors, there is the potential the company may end up in receivership or liquidation. It should be noted that the administrator, in its report to creditors, will identify the value of the investor’s DOCA proposal as well as the alternative outcomes of liquidation.

However, in the short term, given there has already been interest for investment in Virgin Australia, there is good hope for Australian travellers that it will continue to fly for years to come.

Peta Baldwin is Purple’s State Director in Queensland and an expert in investor relations and the resources industry. She has worked in in-house roles at Mount Isa Mines, Alcoa and most recently AngloGold Ashanti. Contact Peta

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