Ratings agency, Moody’s has cast doubt on the story earlier this week in the Financial Review that Virgin Australia and Affinity were looking to sell Virgin’s Velocity Frequent flyers plan.
The AFR reported on Monday that the two were preparing sales documents in anticipation of a sale of Velocity Frequent Flyer. Virgin controls 65% and Affinity 35%.
“There has been no statement by Virgin regarding the validity of the article. Should a sale of Velocity materialize, we would view as credit negative for Virgin,” Moody’s statement in a commentary released on Thursday morning.
“Velocity provides Virgin with business profile diversity because the earnings are not directly linked to the more volatile airline earnings, and therefore provide a source of earnings stability. We also believe Velocity generates strong cash flow.
In the fiscal years that ended 30 June 2017 and 2018, Velocity accounted for 31% and 20% of EBITDA, respectively.
“The reduction in the contribution in 2018 was mainly due to record earnings from Virgin Australia Domestic, but also to an earnings decline at Velocity resulting from the Reserve Bank of Australia’s changes to the credit card interchange regime.
“This was a one-off event and is not indicative of volatility in the frequent flyer business.
“We would only consider the transaction to be credit positive for Virgin if the sale proceeds were used to pay down debt to a level that compensated not only for the loss in earnings but also for the loss in diversity and stability of those earnings.
“We do not know whether Virgin is considering a sale of the division, however, there has been market speculation that Affinity, which purchased the 35% stake in Virgin in 2014, has been considering selling the stake for some months.
Moody’s added, “Our base case view is that we would not expect Virgin to sell its stake in Velocity.”
Virgin shares rose 2.7% to 18.5 cents.