This morning, the Virgin Australia Holdings Ltd (ASX: VAH) share price went into a nosedive following the release of a market-sensitive announcement.
In a statement to the ASX, Virgin Australia revealed the outcomes of its recent capital structure review.
As part of the new strategy, focused on operational and capital efficiency, Virgin Australia said it will strengthen its balance sheet, improve earnings and cashflow, and support new opportunities by conducting an $852 million capital raising (i.e. selling new shares).
At an offer price of $0.21, the new shares will be issued at a 29% discount to yesterday's closing price of $0.295.
Virgin Australia's largest institutional shareholders, such as AIR N.Z. FPO NZ (ASX: AIZ), HNA Innovation, Nanshan Group and Singapore Airlines, have agreed to take up their entitlements.
Along with the company's previously announced $159 million private placement to HNA Innovation, total proceeds will amount to $1,011 million — almost 100% of the company's current market capitalisation.
"Our renewed capital structure will strengthen our balance sheet, provide additional liquidity and help fund initiatives to improve earnings and cash flow," Virgin Australia CEO, John Borghetti, said. "Additionally, the new program of operational and capital efficiency initiatives will further deepen our focus on having a low, sustainable cost base."
The company says the proceeds from the capital raising will help it implement an efficiency program, leaving the company with a more scalable and productive fleet. Moreover, the proceeds from the private placement will be used to repay the outstanding shareholder loan facility and other debt facilities, together with other initiatives.
The company expects to incur non-cash balance sheet impairments amounting to between $150 million and $200 million over the period to 30 June 2019. It is also forecasting annualised free cash flow savings of $300 million by the end of the 2019 financial year.
Foolish takeaway
Airlines are tough businesses to run, and the industry at large has proven to be a wealth destroyer. In my opinion, with Virgin Australia at the mercy of oil prices and competition, long-term investors may be well-served watching this one from the sidelines.
