Embattled Virgin Australia's $150m loan from Velocity "an investment"

Velocity Rewards confirms a $150m loan to Virgin Australia in 2014 remained unpaid when the airline went into administration.

By David Flynn , April 28 2020
Embattled Virgin Australia's $150m loan from Velocity

Virgin Australia's own frequent flyer arm will chase down its parent airline for up to $200 million, based on a $150 million loan plus interest, as one of some 10,200 creditors owed an estimated $6.8 billion by the failed airline.

Velocity Rewards runs the Velocity Frequent Flyer scheme as a wholly-owned division of Virgin Australia but is cast as a separate legal entity and an independent trustee.

It will join a long line of lenders and financiers, aircraft leasing firms, airports and other landlords, suppliers and airline employees at the first meeting of creditors to be held on Thursday April 30 at 11am.

On April 14, as uncertainty mounted over the fate of Virgin Australia and one week prior to the airline being placed into administration, Velocity Rewards emailed all 10 million members of the frequent flyer program to reassure them "that Velocity is set up in a way that safeguards member value by having a trustee that looks after the interests of members."

However, a spokesperson for Velocity has today confirmed that the program extended "a secured loan of $150 million to the Virgin Australia Group" in 2014 – the same year that the airline sold a 35% stake in Velocity to private equity firm Affinity Equity Partners for $335m, and recorded an overall loss of $355m.

The loan, which was never repaid, has been rolling over every 12 months and accruing interest at a commercial rate" for at least five years.

Velocity says its $150m loan was "an investment"

"The Velocity Frequent Flyer program has always had a trust to protect the interests of members," the Velocity spokeswoman said.

"The independent trustee, Velocity Rewards Pty Limited, has general fiduciary duties which exist as a matter of law and a governance structure that includes an independent director and policies directing how trust funds can be invested. The trust holds a portfolio of investments, one of which is a secured loan of $150 million to the Virgin Australia Group."

In Virgin's 2019 annual report, auditors KPMG estimated the outstanding value of unredeemed Velocity points or "unearned loyalty revenue" – based on "the stand-alone selling price of reward points", including points likely to lapse before being spent, to be $497m.

Virgin Australia CEO Paul Scurrah, who remains at the helm of the airline during the administration process, said last week that Velocity member's frequent flyer points "are not at risk, they are covered, cash-backed in a trust, so our customers can be assured those points are safe."

The Australian Financial Review reports that "Velocity Rewards will also pursue Virgin Australia for $10 million worth of pre-bought seats set aside for frequent flyer members."

However, it notes that "the scale of the loan and decision to pursue the airline as creditors will intensify the pressure on independent trustee Jonathan Sweeney to outline more detail around the specifics of the loan agreement, and why making it was in the best interests of members of the loyalty program."

Fully-owned, but frozen

In September 2019 Virgin Australia spent $700m to buy back Affinity's 35% stake in Velocity and resume full ownership of the scheme, which across the first half of the 2020 financial year delivered the airline slightly more in pre-tax earnings ($69m) than its entire domestic and international flying operations ($66m).

Virgin has now frozen the Velocity program to prevent points being spent on anything from flights to gift cards until at least late May, following a run on points which threatened to weaken the airline's already-precarious cash balance.

Scurrah said the rush to redeem points was sparked by a "reduction in confidence" once the airline's request for a $1.4bn government bailout was made public.

"When our original request to the government made its way into the newspaper there was a run on Velocity points that we weren't able to slow down," he told media during a briefing on the airline's decision to go into voluntary administration. "We need to make sure that we preserve as much value as we can as we get through this process."

David

David Flynn is the Editor-in-Chief of Executive Traveller and a bit of a travel tragic with a weakness for good coffee, shopping and lychee martinis.

20 Oct 2015

Total posts 53

People were initially blaming Paul Scurrah for this, thinking that he'd leant on Velocity to help keep Virgin solvent, but it looks like we can blame Borghetti for this one as well. I increasingly get the feeling that Scurrah is almost an innocent bystander in this wreck!

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 289

Velocity members should explore legal action against the Directors of the Trustee. Investment? It might be one thing if interest was paid, even if only annually, but credited isn't the same.

29 Apr 2020

Total posts 1

Agreed. Pretty disgusted by this news, and the blatantly poor excuses used to attempt to justify their actions.

Virgin Australia - Velocity Rewards

04 Mar 2020

Total posts 1

Thank you for the continued VAH updates, David.

16 Apr 2020

Total posts 1

Reminds me of Gary Toomey coming in at the end of Ansett - the damage was probably already done.

Virgin Australia - Velocity Rewards

24 Aug 2011

Total posts 754

Yeah, that seems like it. Same as Dave Buttner for GM-Holden. Damage was already done.

Joe
Joe

03 May 2013

Total posts 493

What a circus...wonder what other 'secrets' are hidden and yet to be revealed in the deep dark cargo holds of Virgin Australia.

06 Feb 2014

Total posts 120

Wow - the trustee has some serious questions to answer....

18 Mar 2020

Total posts 10

Has Virgin or KPMG reported on what happens to the Travel Bank? I have over $3000AUD from flights that Virgin cancelled.

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 289

In the creditors meeting just now, Strawbridge acknowledged the importance on the account holders to Virgin's future success and that balances would be available to purchase airfares in the near future. Time will tell.

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 289

Perhaps Borghetti & Co chose to 'invest' some of this in Bitcoins, Horse #5 in Race 4 at Rosehill or 'Red' on the roulette wheel down at Jupiters?

Virgin Australia - Velocity Rewards

15 May 2015

Total posts 9

Well it all looks more than a bit unusual a loan that hasnt actually paid interest for 5 years! The "trustee" also is Chairman Perpetual Trustees Investment Committee which I also have a fair bit of money in, hes also Chair of 8ec, currently suspended on ASX and Director Funds Board BT Financial Group and Executive Coach at ECI Partners. An interesting resume, one would really want to know on what basis as 'trustee' he loaned $150M to velocity and has not actually got any interest! Can I ask him to lend me $1M please and I will coach him on how to pay back a loan !

Qantas - Qantas Frequent Flyer

16 Mar 2018

Total posts 9

It would be interesting to learn what the actual net value of velocity will be. Interest and repayment of the generous loan will never happen with a total debt of was it $6 Billion. What puzzles me over and over is in our so over-controlled world and the stringent requirements to comply with annual audits, ASX and ASIC rules, how could something like this slip through the cracks for 6 years. Also, a good point.....who at Velocity had permission to invest in a loss making airline, granted it was the parent company......it was loan, sorry, no investment and therefore interest should have been paid in accordance with Div7A rules......a titanic event turned upside down.....the tip of the iceberg are in in fact soft clouds.

What a shame and what a sky high way of passing around losses like the deck chairs on the titanic.

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 289

Quite right, Crane62, I'd imagine this must be a massive breach of the Trustee's fiduciary obligations (as generally understood). It's possible the 'Trust' was never anything more than a shill, and the Constituent Deed contemplated such a loan. If it did, that doesn't reflect well on VAH management of the day. If the Deed doesn't expressly contemplate such a loan, The Trustees and its directors could be in real trouble. KPMG's obligations aren't to Volicity members per se, but it will be interesting to learn if their reports to the Trustee's shareholders, namely VAH, opine on the ethics of the deal done. Not relevant whether VAH did anything in response to the report, but whether KPMG endorsed or cautioned against it.

All it takes is some well-heeled, or well connected, Velocity members who lose enough $$$, and this flight takes off. The PERSONAL consequences to directors of VAH and the Trustee will be decided by the courts.

Virgin Australia - Platinum

26 Jun 2011

Total posts 73

SQ have "book the cook", sounds like VA has "cook the book".

Joe
Joe

03 May 2013

Total posts 493

This is why you don't waste good money, public at that, bailing out a lost cause. The government aren't stupid. Clearly when they assisted Qantas in the past they did their due diligence and it paid off. This time their due diligence told them no and again paid it off.

The emotional union and other rants demanding bailout now ring hollow.

Virgin Australia - Velocity Rewards

17 Aug 2017

Total posts 22

I wasn't worried about my points but I am now. What a fiasco!

05 Apr 2017

Total posts 11

Thanks mickeyg; enjoyed that !!


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