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Virgin Atlantic Set for $1.25 Billion Rescue

Christopher Jasper
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Virgin Atlantic Returns to Skies Bracing for Three-Year Slump

(Bloomberg) -- Virgin Atlantic Airways Ltd. announced a 1.2 billion-pound ($1.5 billion) rescue in a major victory for Richard Branson, who snatched his U.K. airline from the brink of failure under the weight of the coronavirus crisis.

U.S. hedge fund Davidson Kempner Capital Management will provide about 170 million pounds in secured financing, according to a statement Tuesday, while Branson will contribute 200 million pounds after raising money from space venture Virgin Galactic Holdings Inc.

The plan also relies on creditor deferrals, with Virgin Atlantic planning to use a court-sanctioned process to overcome any dissenting minorities.

Branson and his team, led by Chief Executive Officer Shai Weiss, secured the private bailout after Britain refused to contribute taxpayer funds when the carrier was grounded by the pandemic. After months of uncertainty, the mogul, who turns 70 this week, is set to retain control of a business he founded in 1984, though future prospects will hinge on the return of U.S. travel.

“This doesn’t mean that we are out of the woods 100%. But it shows that people believe in the future of Virgin Atlantic and our business plan,” Weiss said in an interview. He predicted that the carrier will return to profit in 2022 as traffic gradually recovers to 2019 levels.

The loan from Davidson Kempner will be secured against planes and aircraft slots, Weiss said. The New York firm, which has about $30 billion of assets under management, won the deal after offering more favorable terms than other potential backers, people familiar with the matter said on July 10.

An alliance of Elliott Management Corp. and U.K. investment firm Greybull Capital declined to match it, while Centerbridge Partners stepped back after coming late to the process, the people said.

The plan includes 450 million pounds of creditor deferrals, and 400 million pounds of payment delays or waivers from Branson’s Virgin Group and co-owner Delta Air Lines Inc.

Delta’s contribution to the rescue involved “deferral of brand fees, as well as certain other joint venture fees we would typically earn,” Chief Executive Officer Ed Bastian said on a conference call Tuesday. He declined to provide additional details.

Tax Haven

Branson’s abode in British Virgin Islands -- where residents pay no income or capital-gains taxes -- made a state bailout politically difficult. The U.K. government earlier rejected his plea for a loan guarantee for Crawley, England-based Virgin Atlantic on the grounds that its credit rating was too low.

The snub launched weeks of frenzied talks to save the stricken airline. Weiss pitched his recovery strategy to a dozen potential supporters in a virtual presentation in May.

That led to interest from several parties, while Branson raised more than $400 million to help his companies by selling shares of Virgin Galactic.

One of the thorniest issues involved freeing up credit-card payments withheld by settlement firms in case Virgin Atlantic went bust. That matter was resolved in the last few days, people familiar with the matter said.

Court Plan

Aircraft-leasing firms have largely gone along with the proposals, while about 880 million pounds related to aircraft deliveries was re-phased and financed over the next five years. Weiss said the accord applies mainly to Airbus SE A350 jetliners.

Cost cuts, including the elimination of more than 3,000 jobs, the closure of a base at London Gatwick airport, and the retirement of older jets, will save 280 million pounds each year.

Delta, which owns 49% of Virgin Atlantic, had said it wouldn’t put in more cash. However, the U.S. airline will make a significant contribution by delaying outstanding marketing fees and other dues.

Virgin Atlantic will launch a restructuring process in the U.K. to make its plan binding on all creditors if it gets support from 75% of them. Weiss said backing is “there or thereabouts” for each class of creditors, and that he was confident of clearing the court hurdle.

Cheeky Challenger

Branson, then a 30-something music entrepreneur, started Virgin Atlantic after a trip to the Caribbean on a commercial airliner was canceled at the last minute. He chartered a plane on the spot, paying with his credit card, and sold seats to the other passengers whose flight had been bumped.

In time, the company grew to become the only credible U.K. competitor to British Airways, inciting an intense rivalry that continues to this day. Branson’s airline operates mainly on trans-Atlantic routes between London and U.S. destinations like New York and Los Angeles. The fleet will be pared back to 37 planes from more than 40.

The North Atlantic niche is normally the most profitable in the entire airline industry. But Virgin has had to park its fleet due to the coronavirus, and restrictions on flying between the U.S. and the U.K. have caused a continuing collapse in demand, even as other travel markets begin to open with the easing of lockdowns.

On Tuesday, the EU recommended keeping its external borders shut to Americans and most other foreigners for at least two more weeks, Bloomberg News reported.

EU Resists Further Travel Opening With New Virus Wave a Risk

Weiss said the return may be a slow one but that it will be aided by the expansion of so-called air bridges between specific countries and later by health passports showing passengers are Covid-free.

(Updates with comments from CEO starting in fifth paragraph)

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