A Sydney-based advisory firm is proposing a debt for equity deal that could see it snatch control of Virgin Australia. Just hours before the deadline for final bids for the collapsed airline, bondholders have got together to present a deal to the airline's administrator. It's a proposal, the bondholders argue, that offers greater bang for the buck than what's already on the table.

Bondholders looking to get a better deal

Following the airline's collapse, Virgin Australia bondholders have been left holding around US$1.43 billion of unsecured debt. The professional advisory outfit, Faraday and Company, is now representing a number of those bondholders. They have been talking to Virgin Australia's administrator, Deloitte, for the past fortnight. Faraday wants to swap debt for equity and pump more cash into the airline. If successful, they will have disrupted a carefully calibrated process to relaunch Virgin Australia.

The two shortlisted bidders, Bain Capital and Cyrus Capital Partners are due to submit their final, binding bids by the close of business on Monday. The well resourced Bain Capital is tipped to come out the winner. But Cyrus Capital Partners has been consistently underestimated throughout the entire process.

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Final bids due tonight, but some disquiet at bidder's plans

The Australian Government is keeping a close eye on the administration process. Last week, there were reports that the government was unhappy with both Bain and Cyrus Capital's plans to streamline Virgin Australia. The government fears a relaunched airline will concentrate on busy trunk routes at the expense of regional routes.

However, given that the Australian Government has repeatedly declined to invest in or lend to Virgin Australia, their concerns may fail to gain much traction at Deloitte.

Also unhappy are several unions representing some 10,000 Virgin Australia employees. They fear substantial job losses with either a Bain or Cyrus owned airline. The unions are said to be less than impressed with the details of both bids. Collectively, the Virgin Australia employees make up the bulk of the collapsed airline's creditors.

An interesting new spin on things

In this environment, and close to the deadline for final bids, the move by the bondholders puts an interesting new spin on things. Australia's Corporations Law allows the bondholders to submit their proposal outside the administrator's preferred bidding process.

Virgin Australia was selling bonds as late as last year. They are now trading at around ten cents on the dollar. The bondholders include both institutional and retail investors. Many bondholders believe their bonds are worth more than this. As unsecured creditors, they are among the last in line when Virgin Australia is sold, and Deloitte starts dealing out the proceeds.

Faraday and Company reportedly have a 50 person team working on their proposal. They've brought in blue-chip Sydney legal outfit Corrs Chambers Westgarth and Rob Sherrard, who helped set up Virgin Australia two decades ago.

Bondholders reluctant to accept potentially lowball offers

The team is critical of leaks that appear to be prepping bondholders for a smaller than expected return. One unnamed bondholder told The Sydney Morning Herald today that "anything would be better than what Cyrus or Bain will offer".

It should be noted that Faraday doesn't represent all bondholders, just some. But they believe the future of Virgin Australia is underestimated. When travel rebounds, they see a huge uplift in demand. This proposal may prove a winner with many small Virgin Australia investors potentially left out of pocket. Whether Deloitte likes the deal remains to be seen.

Like all good sagas, there's always another twist around the corner.