Virgin America files for IPO

Old Jul 28, 2014, 6:59 am
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Virgin America files for IPO

http://www.reuters.com/article/2014/...0FX0TB20140728


S-1 Document:
http://www.sec.gov/Archives/edgar/da...d761206ds1.htm
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Old Jul 28, 2014, 11:06 am
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A few interesting tidbits from the S-1:

A few interesting tidbits:
•It looks like foreign ownership rules were largely managed through debt instruments...much of this offering is connected to a related party restructuring.

•"We primarily operate out of recently renovated Terminal Two at SFO under an operating lease extending through June 2021, with occasional use of a gate in the international terminal for incoming flights from Mexico. We have preferential access to seven Terminal Two gates, common use access to one Terminal Two gate and common use access to all 28 international terminal gates." Did not know they had common use access to the International Terminal.

•"Our second largest operation is at LAX, where we operate out of Terminal Three under an airport lease agreement that provides us with the preferential use of six airport gates and access to additional common-use gates as necessary...While space is limited at LAX, we believe that our leased gates are capable of handling our expected growth in operations and that the planned facility improvements will enhance our airport guest experience."

•"commencing in the first quarter of 2016, an increase in the annual license fee that we pay to the Virgin Group from 0.5% to 0.7% of our total revenue until our total annual revenue exceeds $4.5 billion, at which point our license fee would be 0.5%"

•Our amended and restated certificate of incorporation will require a 66 2/3% stockholder vote for the amendment, repeal or modification of certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws including, among other things, relating to the requirement that stockholder actions be effected at a duly called meeting and the designated parties entitled to call a special meeting of the stockholders. The combination of the lack of cumulative voting and the 66 2/3% stockholder voting requirements will make it more difficult for our stockholders to replace our board of directors as well as for another party to obtain control of us by replacing our board of directors. Because our board of directors has the power to retain and discharge our officers, these provisions could also make it more difficult for stockholders or another party to effect a change in management. In addition, the authorization of undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change our control.

•Under the New Co-Brand Agreement, the credit card partner is required to provide annual guaranteed advance payments over the contract term. Any unearned advance at the end of the calendar year is carried over to the following year until the contract expires. At the end of the contract, the Company has no obligation to refund any unearned advances to the partner. As of March 31, 2014, excess advances totaled $27.9 million, which the Company recorded as air traffic liability.

•Under the revenue recognition rules for multiple element arrangements, the Company determines best estimated selling price (“BESP”) of each element and allocates the arrangement consideration using the relative selling price of each element. Based upon the preliminary valuation of the New Co-Brand Agreement, the majority of the value is attributable to point or the travel component and brand and customer list, for which the BESP is determined using management and market assumptions as well as other judgments necessary to determine the estimated selling price of each element. When developing the relative selling price allocation attributable to the points or travel component, the Company primarily considered the total number of points expected to be issued, the BESP for points (specifically the value at which points could be redeemed for free or discounted travel), the number of points expected to be redeemed, and the timing of redemptions. The BESP for points is derived based upon management estimate of the redemption rate used by its guests to convert points into the equivalent ticket value for travel on either Virgin, or one of its airline partners. This estimate also considered anticipated point devaluation and discounting factors driven by redemption timing.

•The Company estimates breakage for sold points, using a regression analysis model supplemented with qualitative considerations, which include the history and success of the program, as well as member behavior. In addition, the Company also considers redemption trends by performing a weighted average redemption rate calculation to evaluate the reasonableness of the calculated breakage rates. Breakage is recorded for sold points under the redemption method using points expected to be redeemed and the recorded deferred revenue balance to determine a weighted average rate, which is then applied to actual points redeemed. A change in assumptions as to the period over which points are expected to be redeemed, the actual redemption patterns, or the estimated fair value of points expected to be redeemed could have a material impact on revenue in the year in which the change occurs as well as in future years. Management estimates could change in the future as Elevate members’ behavior changes and more historical data is collected.

•Lease Rebates received at the start of the amended leases are accounted for as an incentive to be recorded as a reduction of rent expense on a straight-line basis over the lease term. Payment of future Lease Rebates are contingent on the Company maintaining $75.0 million of unrestricted cash as of the last day of each month and recognized as a reduction in rent expense when the liquidity requirement is met. Under the amended lease agreements, for substantially all of the lessors who are providing Lease Rebates from monthly base rent, the Company is obligated to refund 25% of all the Lease Rebates received through December 31, 2016 in the first quarter of 2017 or on a pro-rata basis with any debt repayment occurring prior to the first quarter of 2017. Refundable Lease Rebates are recorded as a component of the deferred rent balance in the consolidated financial statements. The aggregate lease rebates earned and recorded as contingent rent in 2013 and in the first three months ended March 31, 2014 (unaudited) were $11.1 million and $4.9 million, respectively.
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Old Jul 28, 2014, 5:03 pm
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Investors and airlines are much like Charlie Brown and Lucy on a football play date. Sure, it's always ended badly, but maybe this time will be different.
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Old Jul 28, 2014, 7:02 pm
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Originally Posted by worldwidedreamer
Under the New Co-Brand Agreement, the credit card partner is required to provide annual guaranteed advance payments over the contract term. Any unearned advance at the end of the calendar year is carried over to the following year until the contract expires. At the end of the contract, the Company has no obligation to refund any unearned advances to the partner. As of March 31, 2014, excess advances totaled $27.9 million, which the Company recorded as air traffic liability.
This one caught my eye as well. Seems like a pretty bad deal for the bank to go in on guaranteeing the revenue to the airline with no certainty that they will be able to convince CC customers to buy in to the cards.
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Old Jul 28, 2014, 9:00 pm
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I personally don't think this will be successful... especially since VX financials is lagging so far behind the other carriers. But is there a better time to IPO then right now, when airline stock & revenue is at an all-time highs?

I hold no airline stock and have no plans to in the near future. Anyone planning on investing?
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Old Jul 28, 2014, 9:48 pm
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Originally Posted by sbm12
This one caught my eye as well. Seems like a pretty bad deal for the bank to go in on guaranteeing the revenue to the airline with no certainty that they will be able to convince CC customers to buy in to the cards.
If it's common, it would explain the mega bonuses that come and go. The banks' marketing departments obviously have a goal they need to hit, and even if they have to put those products in the hands of card churners, it's better than eating the cost.
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Old Jul 28, 2014, 10:05 pm
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Originally Posted by DC777Fan
If it's common, it would explain the mega bonuses that come and go. The banks' marketing departments obviously have a goal they need to hit, and even if they have to put those products in the hands of card churners, it's better than eating the cost.
Wow. That's the first time I've ever seen this potential explanation for the occasional mega bonus offers. It seems very plausible. Maybe share that idea in Miles & Points.
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Old Jul 30, 2014, 1:05 pm
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Virgin America's finances are ugly. Very ugly. So ugly, in fact, that its credit card processors have imposed "significant" holdbacks of cash:

Our credit card processors have the right to impose larger holdbacks which could have a material adverse effect on our business.

Most of our tickets are sold to customers using credit cards as the form of payment. Our credit card processors have rights in their agreements to hold back receivable monies related to tickets sold for future travel services (i.e., a “holdback”). Any related holdback is remitted to us shortly after the customer travels. Holdbacks are commonly imposed on newer or less creditworthy airlines, and we currently have significant holdback requirements with our two primary credit card processors, Elavon Inc. for Visa/MasterCard and American Express. If a credit card processor determines there is a material risk with respect to our business or liquidity, it has the right to increase the amount or duration of the holdback. Any increase in the amount or duration of our holdbacks may negatively impact our liquidity and materially adversely affect our business.
Source: bottom of page 26 of S-1 (linked above).

Contrast that with AA, which did not have any credit card holdbacks imposed by its credit card processors, despite a decade of significant losses. US Airways was subject to a credit card holdback following its massive losses in 2008-09.

Credit card holdbacks are a warning sign; they're evidence that the credit card processors are worried about non-performance and possible Ch 11 reorganizations.

Yes, the IPO market is on fire right now, but IMO, VX should put another couple of profitable years behind it and firm up its relationships with key players (like its credit card processors) before it goes public.

Oh well - caveat emptor.
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Old Jul 30, 2014, 7:06 pm
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FWAAA, you should have read the S-1 closer. You missed the 'Letter of Credit Facility' on page 124.

Letter of Credit Facility

In connection with the 2014 Recapitalization, we anticipate that the Virgin Group will arrange for a $100.0 million Letter of Credit Facility to be issued on our behalf to certain companies that process substantially all of our credit card transactions. The Letter of Credit Facility will allow these companies to release approximately $100.0 million of cash collateral to us. In turn, we intend to use the released cash to repay $100.0 million of the principal and accrued interest due under certain of the 5% Notes held by the Virgin Group. We anticipate that the Letter of Credit Facility would contain an annual commitment fee of 5.0% payable by us to the Virgin Group, and that the Virgin Group would cause this Letter of Credit Facility to be provided for a period of five years from the date of this offering. In addition, we would also be responsible for annual fees associated with the issuance and maintenance of the Letter of Credit Facility. The Letter of Credit Facility would only become an obligation of ours if one or both of our credit card processors were to draw on the Letter of Credit Facility. In addition, we will be restricted from incurring any future secured indebtedness related to our assets that would be unencumbered after the consummation of the transactions contemplated by the 2014 Recapitalization Agreement unless our guaranty obligations to the Virgin Group are secured on a pari passu basis with such secured debt. The Letter of Credit Facility will be reduced or terminated to the extent that collateral requirements are decreased or eliminated by our credit card transaction processors. For more information, see “2014 Recapitalization” elsewhere in this prospectus.



On page 41, Credit Card Holdback on 31 March 2014 was shown to be $160,074,000. So the IPO will actually free up quite a bit of restricted funds that will be used to pay down debt (although it's pretty much a wash in annual costs, as they have to pay Virgin Group $5 million/yr for the Letter of Credit Facility).



I personally found the 2013 and 2014 Recapitalization portions of the S-1 to be the most interesting, as that looks like where most of the financial shell games lurk. In exchange for some fairly large haircuts, Cyrus Capital and Virgin Group got a huge number of exercisable warrants that will significantly increase the stock float after the lockup period should they decide to convert their warrants to stock.
I won't even get into the poison pill provisions in the S-1. I haven't read the S-1 closely, but it's an interesting read.


From my first look at the S-1, this should give Virgin America enough cash on hand to keep going for the next 3 years. If they can improve their margins, they've got a chance of surviving longer term.

Last edited by Seat2C; Jul 30, 2014 at 9:43 pm
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Old Jul 30, 2014, 9:42 pm
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Originally Posted by Seat2C
I personally found the 2013 and 2014 Recapitalization portions of the S-1 to be the most interesting, as that looks like where most of the financial shell games lurk. In exchange for some fairly large haircuts, Cyrus Capital and Virgin Group got a huge number of exercisable warrants that will significantly increase the stock float after the lockup period should they decide to convert their warrants to stock.
I won't even get into the poison pill provisions in the S-1. I haven't read the S-1 closely, but it's an interesting read.
Well, that's how the VC funds and Virgin get out of holding the bag, isn't it, by transferring to stockholders post-IPO?

Should be fun... and I don't think I plan on buying any stock for a while, not when there are airlines out there that actually produce dividends...
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Old Jul 30, 2014, 10:30 pm
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I'll be amazed if someone who buys the stock on IPO day and holds it for five years has a gain after those five years. Nothing against VX -- that's just how it usually goes with airline stocks.
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Old Jul 31, 2014, 3:46 am
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Originally Posted by eponymous_coward
Well, that's how the VC funds and Virgin get out of holding the bag, isn't it, by transferring to stockholders post-IPO?

Should be fun... and I don't think I plan on buying any stock for a while, not when there are airlines out there that actually produce dividends...
Absolutely; the interesting part (for me) to watch is how Virgin Group will have to watch foreign holdings very closely in order to exercise their warrants. They're currently at 22% and I'm guessing that they'll try to sell their entire 3.2M share initial stake during the IPO.

Virgin Group has warrants for 60M shares convertible @$5/sh, 155M shares convertible @$2.50/sh, and 7.8M shares convertible @.01/sh. Cyrus Capital and VAI MBO Investors LLC don't have as generous exercise prices on their warrants, although the top warrant exercise price is $20/sh.

This should be an interesting stock to watch at the end of the lockup period; I expect massive share dilution. They've structured the debt to keep VX payments low through the end of 2015 so I'd expect to see a ton of warrants exercised before 2016.
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Old Nov 3, 2014, 9:03 am
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This morning, Virgin America filed a price range for its IPO. Shares are expected to be between $21-$24. The airline expects to raise about $300 million.

http://dealbook.nytimes.com/2014/11/...in-i-p-o/?_r=0

Is anyone here planning on buying VX stock?
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Old Nov 3, 2014, 12:50 pm
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Originally Posted by FTcadence
This morning, Virgin America filed a price range for its IPO. Shares are expected to be between $21-$24. The airline expects to raise about $300 million.

http://dealbook.nytimes.com/2014/11/...in-i-p-o/?_r=0

Is anyone here planning on buying VX stock?
I will pass..

This is great customer-focused company that I like, but perhaps a bad investment...

I am trying to get my head around the $250 mil they borrowed from Cyrus Capital and Virgin Group at 17% ( a Comenity credit card might have been cheaper), and secured by virtually all assets of the company. They borrowed this money in 2011 and 2013. I can't fathom why the rate had to be that high.
Anybody who agreed to pay 17% on a secured loan a year ago has some issues. they are only paying back a portion of it with the proceeds of this IPO. Paying it all off (or refinancing it at half the rate) is in the best interest of the company.

I also wouldn't mind hearing more about the $5 million in stock Cyrus is giving non-officer VX employees, which they are promptly selling - See info on selling shareholders . Though they likely deserve it, why are the employees getting this gift? why are they selling?

There appear to be a ton of warrants and options at prices between $1.50 -$10.00..Nice payday...This of course is not uncommon today, and does not make it a bad stock

Executive compensation looks pretty reasonable.
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Old Nov 3, 2014, 2:05 pm
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Originally Posted by Pilot05
they are only paying back a portion of it with the proceeds of this IPO.
My understanding from reading the 2104 recapitalization agreement (included in the prospectus, starting at pg 42) is that they are paying back ~50M with cash from the IPO proceeds, and paying off the rest by issuing an additional ~22M shares. This includes their 5% notes as well as their 17% notes.

When they are done they will only have a single newly-issued 50M note at 5%.

Please correct me if I'm wrong -- I've only read through it a couple of times and it's a little terse.

Edit: I am leaning towards passing too. I just want to make sure that I understand exactly what's going on. It's limited to $10k, so I might just buy it and hope for a jump and sell quickly. But probably not.
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