UK Government bails out Hungary’s Wizz Air with £300 million – whilst Virgin Atlantic is turned down

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Doing a bailout quickly and fairly is not possible, unfortunately.  There will always be holes in the system.

As we have covered before, Virgin Atlantic is not able to access the Government’s coronavirus borrowing facility due to a technicality.  Any business which has issued tradeable debt can borrow from it.  Businesses which have not issued tradeable debt cannot.  easyJet has tradeable debt and got £600 millionIHG also took £600 million yesterday despite not needing it.  Virgin Atlantic has no tradeable debt.

Wizz Air has been approved for a soft loan of £300 million

Virgin Atlantic may not be able to borrow from the UK Government, but Hungary’s Wizz Air can.

It has put out a statement to the Stock Exchange stating that the UK Government has given it permission to draw down money from the Bank of England’s Covid Corporate Financing Facility.

The exact amount will depend on Wizz Air’s financial status but, given the F3 rating it holds from Fitch, it should qualify to borrow £300 million at an interest rate of just 0.6%.

I thought Wizz Air didn’t need money?

It doesn’t.

Wizz Air is the financially strongest airline in Europe.  As I mentioned in our Lufthansa article on Saturday, an analyst report from Citi last week estimated that Wizz has enough cash in the bank to survive for 22 months without flying.  This assumes that it repays all outstanding ticket holders IN CASH and continues to pay all of its bills on time.

Wizz Air is borrowing a potential £300 million from the UK Government because it is dirt cheap money.  It has no need for the funding.  The money will, most likely, to be used to repay more expensive bank and bond debt.

How can a Hungarian company borrow £300m at 0.6% from the UK Government?

Companies are allowed to borrow from the Covid Corporate Finance Facility, according to the Bank of England website, if:

In practice, firms that meet this requirement would normally be: UK incorporated companies, including those with foreign-incorporated parents and with a genuine business in the UK; companies with significant employment in the UK; firms with their headquarters in the UK. We will also consider whether the company generates significant revenues in the UK, serves a large number of customers in the UK or has a number of operating sites in the UK. 

Whilst its head office and management team are based in Budapest, Wizz Air is listed on the London Stock Exchange because its domestic stock market is too small and illiquid.  It also has a UK operating subsidiary which is the legal operator of the ten aircraft it bases in the UK.

You can see the Stock Exchange announcement here. 

Given the relatively soft criteria for accessing this money, as long as you have traded debt, Wizz Air may not be the last foreign airline to seek a UK-funded bailout whilst Virgin Atlantic teeters on the brink.

PS.  The UK Government will make a profit on this loan, of course, assuming that Wizz Air survives.  The current 3-year UK Government bond yield is 0.1% so there is a profit to be made by raising money to lend to Wizz Air at 0.6%.

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Comments

  1. Rob surely just bevause the yield of a 3y gov bond is 0.1% that does not mean the government is paying 0.1%

    The base rate is 0.1% therefore I assume the coupon rate on the 3y bonds is a fair bit higher, its just that investors have pushed up the price.

    So the government isn’t really borrowing at 0.1% over 3 years.

    Hell even 12m GBP Libor is almost 0.9% I don’t see why a company like Wizzair should get a considerably better rate than that

    • New debt is issued tied to the current yield. It is paying higher interest on older debt, but these loans are being funded by newly issued debt so arguably it is a straight match.

      • The government sold £3.6 billion of 2024 debt last Wednesday yielding 1%. Average price paid was £103.494 per £100 issued, giving a yield of just 0.123%. It was 2.5 times covered too, so plenty of demand.

        • It’s easy to generate demand when you print the money. Currently £645bn of money borrowed by the UK government to pay it’s bills has been printed by the BofE (aka UK government).

          I could live a great lifestyle if I was allowed to print money and borrow it at 0.1-0.2%.

          I might even decide on repayment date to swap the loan for a new one 😉

          If anyone had suggested this back when I did A level economics the teacher would have found it laughable and muttered something about inflation.

        • PAUL VICTOR TEMPERTON says:

          Thank you for making that clear. It is indeed surprising that bond arithmetic, specifically the calculation of the gross redemption yield, is not widely understood.Even more simply: you pay £103 to the government now, it gives you back £100 in three years, which wipes out (just about) your coupon income of £1 a year for three years.

      • Conversely the last 3 year gov bond auction was on 7th April. Coupon rate was 0.125% but sold below par meaning a YTM of closer to 0.2% so not too much higher I guess.

        However I still think its ridiculous that the gov is lending money at such low rates to business that may not need the money and may just be scraping an IG rating.

  2. Could we get this article translated for those of us who are not stockbrokers or hedge fund managers?!

    • Ryan Berry says:

      If I (gov) offer to borrow £100 at 10%, the the repayment will be £110 easy

      But if you are prepared to pay £105 me £105 for the privilege of having £110 in a year then the interest isn’t 10% but 4.76% (£5 / £105) (I think the maths is right there)

    • Could you clarify which part? I’m not a stockbroker or hedge fund manager and found the article very plain English & straightforward to understand.

  3. Martin Frain says:

    As little John used to say you couldn’t make it up. And here’s me for the last 60 years thinking this country was skint. Any chance of a bail out for a self employed bricklayer who hasn’t worked for the last 4 weeks. Dream on

    • If you are genuinely self employed then you qualify for furlough. If you are operating as a limited company then you can defer some tax payments and get a risk free, interest free loan. If you’re operating cash in hand, then you are out of luck.

      • You can defer your tax anyway. All July self-assessment payments are deferred 6 months.

        Should be fine in a couple of weeks though. All the buildings sites near us are now up and running.

      • The Savage Squirrel says:

        “If you are genuinely self employed then you qualify for furlough… If you’re operating cash in hand, then you are out of luck.”

        Is this the Daily Mail comments section? Full of people who are wrong but can be so with great certainty that they are right? If you operate predominantly cash-in-hand then you fell under the 50k income threshold and a cheque from HMG is on its way. If you played by the rules and declared all your taxable income, it may well be above 50k and then you get nowt (except a tax rise to look forward to so you pay for all the help you didn’t get), and self employed are NOT eligible for self furlough.

    • Lady London says:

      The country’s not skint if you’re rich.
      The country’s only skint if after years of paying in you need social help.

      • Spaghetti Town says:

        That is correct LL. In normal times, people don’t appreciate how good we’ve actually got it until we hit times like this.

  4. Why are the British Government helping some low cost Eastern Block airline with cash reserves until Oct 2021. Disgusting!!!Andy Ingleby- Delube, get your facts correct Virgin Atlantic is registered in Crawley, UK, where it has its headquarters. And Wizz airs CEO has the cheeck to say airlines shouldn’t borrow money.

    • Mikeact says:

      You obviously haven’t been reading the reasons why, or following the comments. It’s quite straight forward even if you find it frustrating,.

    • Hi, I think you’re on the wrong website – you need http://www.dailymail.co.uk. Im sure your views will be more suited over there.

    • Londonsteve says:

      Take the 300 million and buy Virgin Atlantic, run it for the legal minimum period after which you dispose of the low capacity Dreamliners and replace them with A380s bought at near scrap value, sack the entire British staff, import willing crew from eastern block bases and use the LHR landing slots to start flying low-cost to high volume long haul destinations under the Wizz banner with lead-in prices to make even Ryanair wince. Delta, which is not part of the AA-BA-IB-OY joint venture will be happy for the competition provided by the low cost 380s and even grease Wizz entry to Skyteam to help build up a feeder network for its LHR long haul network. As long as that 3rd runway doesn’t get built, Varadi will be laughing all the way to the bank.

  5. Novice says:

    This might have already been discussed but I probably missed it. Wizz are starting flights I think this week. Where are they flying to and I wasn’t aware any countries don’t have restrictions apart from uk?

    Can somebody clarify this?

    • Novice says:

      Btw I don’t use them so I’m just asking cause I can’t believe this is allowed.

      But then it’s not like everyone is actually living by the lockdown guidelines anyway 😒😂

    • No European countries are denying entry to their own citizens, e.g. a Bulgarian in the UK is free to travel to Bulgaria (although 2 weeks quarantine not leaving your house, as my friend will have when he travels there this Friday).

      • Novice says:

        Ok I meant tourists though coz I think they are flying tenerife too. The cynic in me thinks this could be a ploy to not refund tourists.

        • I’d guess there’s enough people in the UK with Polish, Spanish, Italian etc passports to fill planes who want to go back and sit things out there.

    • Michael says:

      I fear you might be right. I was meant to fly with them last week and luckily they’ve said they’ll refund (though it’ll take up to six months!). They’re doing their usual daily flights to Timisoara in Romania which surely has almost no demand.

  6. Yeah. . Money for rich people.. I wanted to make a small 6000£ loan and they gave me 19% /y

  7. Steve Knott says:

    Why is the british government bailing out any airline . Corona is bad but compared to the long term affects of climate change it is a mere blip and airlines ana air travel are one of the biggest producers of greenhouse gasses . Less airlines mean less pollution and a greater chance for the survival of our species . Maybe we should see this as a silver lining to our current cloud . Besides with recession looming and millions of unemployed surely that money would be better invested in their welfare instead of bailing out superfluous foreign billionaires .

    • No, air travel accounts for 2% of CO2 emissions.

      • Thanks for the reality check, an HfP fact checker would be welcome for many of the threads!!

    • Michael Here says:

      Eating animals is a big factor contributing to emissions as animal based “foods” needs significant more resources to be produced compared to plant based foods.

  8. By the way, the only reason Wizz has set up a UK incorporated subsidiary is Brexit.

    • Yup. But this also had some other positive side effects. For example direct Wizz flights between UK and Russia which otherwise were impossible

  9. Stuart Winstanley says:

    Why would the UK Government bail out a Hungarian Airline when the 2nd biggest Airline in the country can’t get a soft loan of £500 million. Something doesn’t seem right there to be honest.

    • Answered this in more depth in an earlier comment.

      Remember BA isn’t actually British, IAG is Spanish. Virgin is 49% owned by Delta (American). Even that is a misnomer because you don’t control who actually owns the public shares.

      British government only cares about if you actually make substantial impact to UK economy, i.e. jobs, presence, use of our other services like land, rent etc etc. We tend to focus too much on profit tax and relevant media outcry, the reality is international companies operating in UK bring much more than that.

      Bailouts comes in different form. The current CCFF initiative (aka “I will buy your low risk bonds”) is a low risk initiative which Virgin Atlantic, based on international and independent credit rating authority is now considered as high risk does not qualify for. Money that they loan out, the government is very likely to earn money from (0.6% interest) and will be paid back next year. This is why it sounds like only the companies who don’t need it gets it, because it is designed that way.

      Next bailout stage means stock holding (how TSB/Lloyds was bailed). Virgin Holding (51%) and Delta (49%) may offer some of the shares to the UK Govt to buy and hold. Virgin also make this is more complex than it is. You need 2 separate parties to agree to sell enough to not disrupt majority ownership, or maybe UK govt demands to be the majority.
      That will only happen if there is actually a chance that the shares will return in value so government can sell it back to private sector in unknown number of years. This is an iffy situation at the moment (can Virgin actually bounce back?). UK govt is basically saying we will not even consider this until you have tried your hardest to qualify for the lower risk CCFF initiative.

      The final stage nationalisation (Northen Rock situation). This is last resort, only happens when ridiculous amount of jobs are at risk + collateral damage to economy. Which other articles has eluded to is a very complex subject and is unlikely with highly competitive airline industry. Nationalisation stifles competition, creates conflict of interest in government policies, in the end everyone loses. It can make sense for monopoly industries like utility and infrastructure, but not airlines. Yes people will lose their jobs if VA folds but it’s not like the vacancy will disappear, other airlines will eventually fill the gap and hire the skills again. (Macro economy is generally inhumane)

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