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

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• Erico1875 says:

  28 Apr28 April 05:56

  Doesn’t seem fair somehow.
  What is traded debt and why is it good to have it?

  • Rob says:

    28 Apr28 April 09:26

    Pension funds and investment funds like a mix of assets. They buy a lot of shares and they buy a lot of property. Both of these are risky, so you need some lower risk assets too. Like loans.

    Pension funds cannot make loans directly. However, instead of borrowing £300m at 3%, a company can sell bonds which pay 3% interest and will be repaid in, say, 10 years. Pension funds can buy these bonds. They are tradeable, which allows the pension fund to sell them to someone else later if it decides it no longer wants to hold them.

    For the borrower, it is more bother than taking money from a bank. However, there is often a limit as to how much the banking market will give you so you end up looking at other options. Bonds can often be cheaper than bank loans too because there are so many pension funds looking for places to invest.

    The pensioners supported by the pension fund need to be certain that the pension fund isn’t buying trash loans. This is why most insist that they can only buy bonds which get a rating from a ratings agency like Moodys or Fitch. (The company issuing the bonds pays rating agencies to rate their likelihood of repayment.) Only bonds which get a certain rating can be bought by most pension funds. If the rating is too low – either originally or if the company is downgraded due to bad trading – the bonds end up being sold to hedge funds or higher risk investment funds instead.

• BJ says:

  28 Apr28 April 05:58

  Trying to get my head around this as a non City type. Do I smell a rat here? Even if everything goes as it should, isn’t the UK government profit going to be wiped out by inflation? What is the timescale over which the likes of Wizz and IHG will repay? Isn’t there a danger that any Tom, Dick and Harry can exploit this by taking the money, distributing it through other parts of their group of companies and then simply going bust to avoid repayments? Are other G20 countries doing something similar or is the UK being more ‘supportive’ than most? Finally, what about less mainstream Financial Services companies, can they access this money and are they doing so? In a nutshell, as a UK taxpayer should I be concerned that this could give rise to the financial scandal of the Century?

  • Erico1875 says:

    28 Apr28 April 06:06

    https://www.youtube.com/watch?v=gM8vOcxatsI

    • BJ says:

      28 Apr28 April 07:35

      Brilliant 😀

      • Sundar says:

        28 Apr28 April 09:23

        Nice ! 🙂

  • John says:

    28 Apr28 April 06:08

    As I understand it, the “UK govt profit” has already been lent to someone else

    • tony says:

      28 Apr28 April 06:54

      No, the UK government is borrowing money in the open market at 0.1%. Those investors would rather take the hit of inflation and instead have the security of the loan to HMG. UK Government then lends on the money at 0.6%, so the taxpayer makes a profit (subject to no default). It’s the selective application of the funds that is going to annoy folk here.

      Separately, on the basis this news was made public the best part of a week ago, and in quite an open way, it amazes me that neither the Mail nor the Express have picked up on this already.

      • BJ says:

        28 Apr28 April 07:43

        Isn’t it the risk of intentional exploitation of default that we should be concerned about here? Sorry for my ignorance but hopefully I’ll grasp it in the end.

      • Sean says:

        28 Apr28 April 08:12

        No the govt is not borrowing in the open market at 0.1%. That is Bank rate and is for short term overnight cash and not the rate they issue longer term Gilts at. They will still make a spread lending for 60bp for 3 years, with an open market rate closer to 160.

  • Lady London says:

    28 Apr28 April 12:05

    yup. the UK taxpayer, personal as well as corporate, has just been wiped out.

    Forget any social services or righting of any social wrongs for at least the next 20 years.

    The poor will suffer most. That’s the real poor, not the mass of lazy benefit claimants that refuse to go out fruit picking instead of sitting at home on their arsches.

• Alex W says:

  28 Apr28 April 06:13

  This situation seems ludicrous, wish I could borrow money that cheaply!! Love him or hate him, Branson employs a lot of Brits that will be redundant if VS go bust.

  In layman’s terms what does it mean to issue tradeable debt? Could VS put a small % of their shares on the stock exchange in order to qualify for a govt loan?

  • mark2 says:

    28 Apr28 April 07:36

    shares are not debt

    • Alex W says:

      28 Apr28 April 08:11

      Thanks for the helpful explanation. As requested, I would be grateful if someone could help put this in terms that can be understood by someone that doesn’t work in finance, please.

      • Sean says:

        28 Apr28 April 08:14

        If you already have a credit card – the Govt will also let you have another one with a £500m credit limit. If you have a charge card then unlucky.

        • Tim says:

          1 May1 May 16:16

          For those who does not understand the CCFF (borrowing facility), this law firm does a good write up.
          https://www.nortonrosefulbright.com/en/knowledge/publications/8809ae81/bank-of-england-launches-covid-19-corporate-financing-facility

          Technically BoE is not lending money (like us mortal with a bank loan). Companies can raise money by issuing bonds (nothing to do with shares) and sell to mortals like us via bank investment funds or brokers. Raising money this way means companies are not tied up by bank rules, like not allowed to borrow more money (say to buy more planes) or sell assets (down size if market is rough) etc. Bonds can have no collaterals, i.e. we plan to give pay you back after we turn a profit. Or it can have collaterals (secure bond), Virgin Atlantic did this a few years ago and used their Heathrow slots as collateral. With collaterals the risk is lower, so the bonds can have lower interest rates.

          Bonds pay out interest every year, you can think of it as a reverse ‘interest only mortgage’, So it is considered a tradable debt because the holder of the bond can sell it on. (Think of it as reverse remortgage).

          A the point of issuing a bond, it will be rated by one of three big credit rating agency. Usually AAA, BBB, CCC (If you haven’t seen the movie The Big Short, they do a good explanation). This rating/credit check will look at your company health as well as the bond risk themselves.

          Bank of England’s CCFF is offering to buy the (up to) 1 year bond that a company is issuing now, rather than companies to flout them on the (now dead) open market. The amount they will buy is 300m/600m/1bn depending on the official risk of the bond. The lowest rating they will accept (£300) is BBB or ‘within Investment grade’ (you can visit Wikipedia under ‘bond rating’ for a table). CCFF states clearly that this initiative is to help “were in sound financial health prior to the impact of COVID-19”. As a taxpayer I think this is fair. This is not an excuse for already failing business to hoover up more money for executives amid a crisis.

          This where Virgin Atlantic falls short, I think calling it a technicality is being too kind. UK government did not ask Branson to find £500m from no where, this is the estimated requirement for them to be in the BBB range to qualify. Without the additional £500m of cash flow they are considered as a business at risk. Any bond they issue now is considered as high risk or ‘junk bond’. Branson may have offered his island as a collateral, but it doesn’t belong to Virgin Atlantic and it isn’t enough to change the rating (unless he actually sold it for £500m cash and donated it officially into VA account).

          You may think that CCFF is a stupid initiative because ‘if you have BBB rating then you don’t need the money’. The reality is just because a company has cash reserve doesn’t mean the jobs are not at risk. To BoE this is a low risk initiative, which helps corporate cash flow so they don’t knee jerk make mass redundancies and also actually get some interest from it. With increased cash flow business can adapt, restructure and retrain staff.

  • Nick_C says:

    28 Apr28 April 08:44

    Virgin Atlantic is a private limited company. As such, It cannot publicly trade shares and is limited to a maximum of 50 shareholders.

    Of course, given the number of people (on here, anyway) who think it has a bright and profitable future, they could try going public. Personally, I’d rather buy tulip bulbs.

    • Adam says:

      28 Apr28 April 08:59

      +1 for getting a tulip mania reference in!

• BSI1978 says:

  28 Apr28 April 06:16

  Regardless of what one thinks of Branson, & the viability (or not) of Virgin. I can’t be the only one that thinks there’s something wrong with what is in effect an overseas firm being able to draw monies that aren’t actually needed whereas other firms, with perhaps more UK presence etc are not?

  Surely there must be some profitability or liquidity criteria that needs to be demonstrated prior to accessing this facility?

  • Frenske says:

    28 Apr28 April 06:37

    You are right. More worrying is that this money can be used to facilitate (hostile) take overs of companies in weaker positions. There are now lots of companies needing life support.

    • Mr(s) Entitled says:

      28 Apr28 April 07:22

      Wizz to buy 51% of Virgin for £300m? It may be worth a cheeky offer.

      • SAVVYTYKE says:

        28 Apr28 April 07:33

        😂

      • Lady London says:

        28 Apr28 April 12:13

        Probably cheaper and more efficient than the government doing it.

• Nick G says:

  28 Apr28 April 06:34

  On the face of it this seems worse than Victoria Beckham asking for cash for furloughing her staff…..from a Wizz Air point of view it makes business sense. From a non city govt employee like me I can’t get my head round it quite honestly. Can’t imagine the same would happen to UK airlines in other EU countries

• Thywillbedone says:

  28 Apr28 April 06:55

  There hasn’t been a whole lot of talk about the repercussions for the taxpayer of these measures to help business but we are in for a serious rinsing…

  Very worrying that a business with the liquidity of Wizzair can access this cheap lending.

  • Mr(s) Entitled says:

    28 Apr28 April 07:31

    Don’t worry about lending to businesses that don’t need the money. Worry about lending money to those that do.

    • Thywillbedone says:

      28 Apr28 April 07:47

      Indeed. But all soft-lending comes at a cost.

• David S says:

  28 Apr28 April 07:04

  It has the whiff of how the government used our money to bail the banks out few years ago.
  I am all for using UK tax payers money to help the UK business in a time of need like this but loaning out that amount of money to a non UK company (despite being on the LSE) that does not need it seems to me like a waste of my hard earned money paid as tax while some UK businesses are still struggling.

  • David says:

    28 Apr28 April 09:46

    The government have borrowing this money. Its not your (or anybody elses) taxpayer money.

    • Rob says:

      28 Apr28 April 09:49

      Magic money tree world, David. If Government spending is 80% taxpayers money and 20% borrowings, you can’t say that a certain transaction comes out of the ‘borrowings’ pot. Anything spent by the Goverment is 80% taxpayers money (and 20% borrowed, on behalf of taxpayers who are on the hook for repaying it anyway).

    • Lady London says:

      28 Apr28 April 12:09

      Not borrowing, printing. That’s why we’re all st*ffed and social provision won’t be met.

• Tim M says:

  28 Apr28 April 07:27

  I could make good use of a million or two. How do I apply?

  • Lady London says:

    28 Apr28 April 12:12

    Hey @Tim M seen some of your previous updates on easyJet. Do you know anything about their current plans or likely dates for them to start flying again?

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