Pearls and Irritations

They don’t even believe in corporate rescues after all. Governments should not intervene in markets, they say. Markets know best, cut taxes, deregulate. That’s the creed.

Three weeks, four stimulus packages and $200 billion later, that creed is finished.

Now Morrison and Frydenberg face the formidable challenge of steering Australia though its greatest financial crisis, a challenge which entails deciding which corporations live and which die. And how they should live and die, or be resurrected.

There is a strong case for bailing out the banks: preserving the stability of the banking system. If the payments system freezes, the lights go out. But taxpayers bailing out airlines and other large corporations? This is a far more delicate proposition.

Particularly so in the case of Virgin Australia Holdings whose shares are 90 per cent-owned by foreign state corporations in China, Abu Dhabi and Singapore; and Sir Richard Branson who resides in his own island in a tax haven. With the utmost chutzpah, Virgin chief executive, Paul Scurrah, has put his hand out for a $1.4 billion gift from taxpayers when Virgin’s share price values the entire company at just $690 million on the sharemarket.

The company’s accounts show there is roughly $3 billion in debt and $1 billion in cash; and aviation analysts reckon they will burn through that cash in as little as three months.

What to do?

• Buy the business, not the company
• Use compulsory acquisition provisions of the Constitution (s51)
• Pay “just terms”
• Preserve staff and planes
• IPO later or sale to another carrier

Yesterday, they declared they would not “bail out” Virgin. There are other options though.

They can stick to their free market principles, let Virgin collapse and its arch-rival Qantas survive as an outright monopoly, a solution which would cost air travellers, indeed the entire economy, dearly.

The Ansett collapse in 2001 is testament to this: taxpayers subsidised staff payouts anyway, and insolvency group Korda Mentha raked out $100 million in fees while the liquidation endured for more than a decade.

Deciding the fate of Virgin Australia Holdings is a serious conundrum; especially serious as Virgin may be a template for other rescues to come, just as Bear Sterns, Lehman Brothers and General Motors were during the GFC.

What are the options here?

The course of action depends on the desired outcome. This is where we can depart from the simplistic language of “bail-out”. The Government has expressed its desire to maintain an aviation industry with two airlines. Presumably, the aim then is, one, to preserve Virgin’s physical assets, the planes; and two, to preserve the human assets, the employees.

They could recapitalise Virgin, throw money at it, effectively deploy Australian taxpayer money to help major shareholders Etihad, the two Chinese airlines and Singapore Airlines.

Conceptually, if the Government either lent Virgin money at mates rates, bought its existing shares or took new equity to recapitalise the airline, Australian taxpayers would be rescuing Richard Branson, the Communist Party of China, the benevolent dictatorship of Singapore and Khalifa bin Zayed bin Sultan Al Nahyan, an Emir in the Middle East.

Given these shareholders have elected not to put their hands in their pockets, to back it themselves – instead urging chief executive Paul Scurrah to plead for taxpayers’ money – and and given the fact that Virgin never pays tax in this country, this option is highly unattractive politically.

Already, the government has provided a leg-up of roughly $1 billion to the aviation industry via waived fees and charges. As entire fleets were soon grounded, it was not a useful leg-up.

Scott Morisson and Josh Frydenberg have other options though. They could offer to acquire the company Virgin Australia Holdings, acquire the shares that it, recapitalise the company and sell it later. No doubt Richard Branson et al would decline to sell without a 30 per cent premium. Any premium however, indeed any price paid for equity, would reward Virgin’s recalcitrant shareholders.

The best solution

This brings us to the most sensible option; acquiring the business, rather than the company.

Section 51 of the Constitution says:

The Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to:

(xxxi) the acquisition of property on just terms from any State or person for any purpose in respect of which the Parliament has power to make laws.

So the Government has the power, should they push a quick act through Parliament, to buy Virgin’s business on “just terms”. Its shareholders have already abandoned it so it would be just to say cheerio to them for the neat consideration of zero cents.

The acquisition legislation could leave the planes’ lessors as unsecured creditors, recognising that there is no market for second-hand 737s at any time in the foreseeable future.

How about Virgin’s creditors, the banks who hold the debt? Again, they have taken the commercial risk and lost. Every airline in the world must already be close to insolvency if not already there.

“Just terms” then, or “fair value” could be determined by some independent experts. Let’s say it is 10c in the dollar for the debt, or $300 million on Virgin’s $3 billion in debts.

To be clear, buying the business means everything which is in the Virgin Australia Holdings box. Pilots, engineers, flight attendants, check-in staff, landing slots, terminals – everything except the executives and their desk ornaments. Cash goes in for creditors to fight over, everything else out.

• What does the Government want? To preserve the assets, both physical and human.
• Who does it pay? Virgin Australia Holdings.
• What does it pay? The fair value of the business.
• What is the upshot? The Government owns the business for $300 million. It flies the planes to Alice Springs, puts them in the desert so they don’t rust, drains the oil. It pays the staff so they are ready to roll when the airline flies again.

Later, when markets recover, the Government either floats the airline off in a new company on the share market – say Josh & Scott Airways (JASA) – or it sells it to another carrier.

Surely, this is the preferable template for corporate rescues, and there will be more, indeed the airports themselves (such as Sydney Airport with its $10 billion in debt) unless the virus is quickly vanquished.

The Government faces an immense dilemma, perhaps greater a economic challenge than any government since World War II.

A plethora of large corporations are veering towards insolvency. Their fate is entirely tied to the coronavirus. Plainly, their debt levels are critical to their fate. Those with more debt are far more perilous straits.

The ramifications of this for shareholders, particularly retired Australians who survive on income from their share market investments, is frightening. Nationalisation can protect them. This template can of course be adjusted, the determination of “just terms” that is, or a fair price depending on the nature of the business and its shareholders and creditors.