Fitch Ratings has downgraded Virgin Australia Holdings Limited's long-term foreign-currency issuer default rating to 'CCC-' from 'B-' due to the increasing uncertainty around whether the airline will be able to obtain additional financing to ensure it has sufficient liquidity while the coronavirus-related travel restrictions in Australia remain in place.
The rating action follows the company's announcement that it is in discussions on restructuring alternatives. While Fitch believes that the company continues to work on financial assistance, the agency stated that travel curbs to contain the COVID-19 pandemic are increasingly straining its liquidity such that default is a real possibility.
“Virgin Australia’s working capital is increasingly being affected by cancellations, minimal bookings and outflows at its loyalty programme as members redeem points for non-flight benefits.
The airline has now grounded most of its fleet to minimise cash outflows, but it is seeking options to shore up its liquidity. VAH's ability to secure this funding is important to maintain its viability,” said Fitch in a statement accompanying the announcement.
Fitch said the measures Virgin took to ground its entire domestic fleet and run only the government-subsidised minimum domestic network will help the airline preserve cash flows. However, the ratings agency said it believed the airline will run out of liquidity over the next six months without fresh third-party support.
“It remains uncertain when the travel restrictions will be lifted, and the time it will take for consumers to return to travel and Virgin’s operations to return to normal.”
Fitch said that debt restructuring was now a possibly for Virgin if it is unable to obtain additional funding or some form of financial assistance from the government or another party.
“In our view, without additional funding over the next few months, there is a high chance that the airline will not be able to survive the impact of the COVID-19 shut down. We believe the government's relief package announced in March 2020, which provides refunds of airport charges incurred since February 2020, provides little support past the end of 2020 given the grounding of most of Virgin’s fleet.,” said Fitch.
While Virgin’s earliest debt maturity is $350 million in October 2021, Fitch said the company is unlikely to be in a position to meet its debt service requirements beyond September 2020 without additional funding.