Failed Virgin tapped frequent flyer trust for loan Ads
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The trust set up to protect Frequent Flyer members lent up to $200 million to Virgin Australia, positioning the company as a creditor to the failed airline and raising questions about how much cash is actually backing the loyalty scheme’s points.

Concerns about the cash backing for the loyalty scheme’s 10 million members arise as the Virgin administrator, Deloitte, estimates that the failed airline owes more than $6.8 billion to 10,000 creditors, much more than the $5.3 billion of interest-bearing liabilities shown in the ’s accounts.

Louise Kennerley

Virgin’s Paul Scurrah told the ABC the loyalty program was cash-backed by a trust.  

One of the most significant creditor groups, Virgin bondholders, are forming a block to strengthen their negotiations – appointing Corrs Chambers Westgarth partner to act as an – and to best position themselves to receive a fair price if the company is sold.

As bidders continue to circle the assets, former banker Michael Carapiet emerged on Friday as the head of NSW’s bid for the airline to be based at Western Sydney Airport, now under construction at Badgerys Creek.

Virgin is estimated to owe its unsecured bondholders, including thousands of retail investors, about $2 billion, which means they are critical to any outcome.

The largest debt by value is the $2.6 billion owed to 26 ‘‘lenders under secured corporate debt and aircraft financing facilities’’; by number, Virgin’s more than 9000 employees are due about $450 million in entitlements.

It is unclear whether Velocity Frequent Flyer, which is fully owned by Virgin, or The Loyalty Trust, the trust set up to protect loyalty members’ points after the Ansett collapse, will position itself as a creditor.

Under the complex corporate structure, the trustee is required to act in members’ best interests, which may mean it prefers a sale of the airline to be completed quickly instead of recovering the loan.

‘‘Velocity Frequent Flyer is worth nothing without Virgin,’’ a source said.

The loyalty scheme, which is fully owned by Virgin after it bought back a 35 per cent stake from private equity last year, has not been placed in voluntary administration, although redemptions have been frozen for four weeks after fears that the airline would collapse prompted a run by its members on redemptions.

If all those members were to redeem their points, the program would need $497.1 million to fund that, according to Virgin’s latest annual report.

The trust lent less than $200 million to the airline, and the loan was secured, a source said.

The airline has said that Velocity has been set up with an independent trustee to ensure its members’ interests are protected.

‘‘Those points are not at risk, they are covered, cash-backed in a trust, so our customers can be assured those points are safe,’’ Virgin chief executive Paul Scurrah said last week.

Mr Scurrah also said there had been a run on redemptions after news that Virgin had sought a $1.4 billion loan from the government, which would have increased the cash demands on the frequent flyer business.

Commercial investments

The Loyalty Trust holds the cash of the frequent flyer scheme and it makes commercial investments on behalf of the members, including loans to Virgin.

Accounts show that the trust had paid regular distributions to Velocity Frequent Flyer, the operating company, including $75 million in 2019.

The operating company had limited cash, the accounts show. After paying more than $100 million in dividends in July and August, the company would have had about $5 million in cash and cash equivalents.

The dividend payments were made to Virgin and Affinity Equity Partners, which owned 35 per cent of the business at the time.

A Velocity representative said accounts for The Loyalty Trust were not public, and declined to provide further details. ‘‘The Loyalty Trust has a governance structure in place that includes an experienced, independent as well as policies governing how trust funds are invested,’’ the representative said.

‘‘The terms of all arrangements with the trustee are confidential and as such we won’t be able to comment further.’’

The trustee for Velocity Frequent Flyer is Velocity Rewards. It, too, does not publish accounts.

Velocity Rewards’ sole director is , who is of listed investment company 8IP Emerging Companies, is on the board of and heads the Perpetual Trustee investment committee.

Mr Sweeney declined to comment when contacted on Friday.

The trust is able to invest in bonds and can lend money at a commercial rate, a source said. It also has an investment committee to assess investments. The committee includes Mr Sweeney and Virgin executives.

Loyalty programs are considered an important, and usually very lucrative, part of an airline’s business.

While airlines – including Virgin, as recently as last year – have considered selling or spinning off the business to unlock more value, most prefer to keep them attached.

Velocity Frequent Flyer earned consolidated revenue of $448.6 million and pulled out $100.9 million in three separate dividend payments in July and August, according to its accounts.

Virgin used to account for the bulk of Velocity’s customer base, but more recently it has been accounting for about half of it. Other customers include the big banks and some retailers, which buy points from Velocity, which are given to customers who later redeem them. That is the point at which Velocity has to pay for the purchases.

Any shortfall in the trust could hurt the value of the frequent flyer points, or possibly Virgin’s ultimate sale price, as any new owner would have to either discount the points or make up the cash difference to ensure it could fund redemptions.

But equally, the loyalty business is valuable to any new owner, who sources believe would not want to damage the program by devaluing the points.

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Jemima Whyte writes on business, specialising in companies, capital markets and innovation. Jemima has reported on business for The Australian Financial Review for more than 13 years. Email Jemima at [email protected]

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