Virgin Atlantic files for bankruptcy protection to aid UK rescue

Richard Branson’s Virgin Atlantic Airways filed for Chapter 15 bankruptcy protection in the U.S. on Tuesday after telling a London court it was set to run out of cash next month if a pending rescue deal isn’t approved.

The airline filed its petition in the Southern District of New York. Chapter 15 allows foreign companies with U.S. assets to protect themselves against claims while they work on a turnaround plan at home.

The company had said during proceedings in the U.K. that it planned to apply for the U.S. protection while it finalizes a £1.2 billion ($2.2 billion) rescue plan that’s already supported by a majority of its stakeholders.

Since January 1, Virgin’s reservations are down 89% year-over-year and demand for the second half of 2020 is at approximately 25% of 2019 levels, according to court papers.

“The group and its business have been adversely affected by the ongoing Covid-19 pandemic, which has caused an unprecedented near-shutdown of the global passenger aviation industry,” according to the court papers. “Global aviation was one of the first industries to be impacted by the Covid-19 pandemic and is likely to be one of the last to fully recover.”

Cash running out

The airline also told a London court that it will run out of cash next month unless it secures approval for the rescue package announced in July.

Virgin’s restructuring plan in the U.K. depends on the approval of its Chapter 15 filing in the U.S., the company said in its court filing.

Without the plan, there’s uncertainty as to whether Virgin could get enough creditor support to implement its restructuring in time to avoid going into formal insolvency proceedings, according to the filing.

Barring rescue funding, available cash will drop to about £49 million by late September, below the £75 million specified in bondholder contracts, Virgin told a judge Tuesday. That would require the sale of Heathrow airport slots against which the bonds are secured, forcing the carrier to fold.

Virgin Atlantic said it obtained an order from the court to convene four creditor meetings on August 25 to vote on the restructuring as part of a process that will bind all debt classes to the rescue plan. The carrier said that creditors in three of the groups have agreed in advance to back it.

“With support already secured from the majority of stakeholders, it’s expected that the restructuring plan and recapitalization will come into effect in September,” a spokeswoman said. “We remain confident in the plan.”

The restructuring must be approved at a hearing scheduled for September 2, after the creditor meetings, or will be placed into administration mid-month with any assets sold, David Allison, a lawyer for the company, told the court.

Virgin Atlantic unveiled the rescue plan on July 14 after the coronavirus crisis shut down flights and the carrier was told that its credit ratings disqualified it from support through a state-backed loans program.

Under the proposals, U.S. hedge fund Davidson Kempner Capital Management will provide about £170 million in secured financing, while Branson himself will contribute £200 million after raising money from space venture Virgin Galactic.

The plan also 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.

Plane-leasing firms that own 24 Virgin jets will be offered three options: a 15% cut in fees until September next year at least, an 80% reduction for the full term, or the termination of leases and the return of aircraft in their current condition.

Trade creditors will take a 20% haircut, with 10% of the remaining balance paid in cash and the rest in quarterly sums through September 2022.

Airlines are under pressure as travelers shun flights to avoid exposure to the coronavirus. At least four U.S. regional airlines have gone bankrupt, and revenue at carriers with vast international networks could see sales plunge 66% this year, according to a Bloomberg Intelligence report.