Bankers weigh all options to save Jet Airways without getting hit

Bankers are scrambling to find a viable option through which money can be infused in Jet Airways. But they are also not willing to take more risks, given their past experience.

Besides, Supreme Court scrapping the February 12, 2018, order of the Reserve Bank of India (RBI) meant that banks can no longer convert Jet’s debt into equity at a nominal rate, but will have to do it now according to a formula set by the market regulator Securities and Exchange Board of India (Sebi). The rules are relaxed from the capital markets side if the company is in corporate debt restructuring or under Insolvency and Bankruptcy Code. Jet Airways is in neither.

According to a senior executive with a public sector bank having a significant exposure to Jet, the consortium collectively decided not to go ahead with the emergency funding. It is not that SBI’s views were blindly followed, the executive said.

Banks have reason to be circumspect about prospects of recovering money. US Exim Bank, which lent to Jet for Boeing planes have the first lien to the 16 planes that Jet owns. Other planes are leased and, thus, the airlines may not have enough tangible asset to start with.

“Exim Bank diligently seeks to protect American taxpayer dollars in all of its transactions. Regarding the Jet transactions, Exim anticipates full repayment of the remaining portion due on the Exim-guaranteed loans, which have been thoroughly collateralised to protect the taxpayers’ interests,” said an US Exim Bank official.

In an email response to Business Standard on 16 April, the official said, “Exim has not sought to repossess any Jet aircraft but is exercising appropriate measures to ensure repayment of the remaining debt and satisfaction of Exim’s financial obligations without loss.” The bank has since then demanded its loan back, or have sought to repossess 10 planes, it is learnt.  

Indian bankers are fearful that going out of their way to save Jet could lead to subsequent harassments from investigative agencies. Almost all banks were investigated upon by agencies after Kingfisher went belly up and a couple of senior bankers were arraigned and arrested for giving loans to a company that had already defaulted. Jet has also been irregular in its payments. It was not in default till December quarter, but in the March quarter, the company could have been marked as default in banks’ books.

“Timely action has not been taken by all participants in the process, including jet management, auditors, consultants and bankers. There was a huge dilly-dally with Etihad. Naresh Goyal should have taken an honourable exit when Tatas offered to buy the company. But he deliberately didn’t want to let go his cash cow. It is very late now,” said another banker involved in restructuring Jet’s Rs 9,000-crore loans. “Unless operationally viable, banks cannot lend more money to Jet. Putting good money after bad would only balloon the debt,” the banker said.

According to the banker quoted first, lenders have approached government with plea that slots should be protected to preserve the enterprise value of the company. “The government is equally interested in reviving the airline, so we have to keep this viability part of it in mind.  Aircraft alone is not enough to make airline viable. The slot and other supporting infrastructure is also key for viability,” the banker said.

Lending to an airline business is a tricky issue. In the absence of tangible assets such as planes, which the companies typically lease out, banks have to rely on ‘slots’ or flying and parking rights. What the banks do in this case is extending a cash-flow-based lending. However, the problem, quite unique to India, is that fares per seat are low whereas aviation turbines are one of the highest in the world. Other expenses such as pilot salaries are at par with global standards. This creates a huge drag on the books of the airlines and it makes sense for them to become no-frills, low-cost airlines.

There are three ways banks can infuse capital in a company — equity, debt and priority funding.

What the banks have been offering now are ‘priority funding’, which has the first charge at the time of liquidation. Bankers say the best way to recover the money already invested is by selling its slots on a piecemeal basis. Sure enough SpiceJet, AirAsia picked up a few slots of Jet while Air India offered to buy five Boeing 777 on a wet lease basis.

Banks were interested in converting the debt into equity initially. The February 12 circular of the RBI suggested that when a large account is in default, banks can convert debt into equity without a hitch.

“Acquisition of shares due to conversion of debt to equity during a restructuring process will be exempted from regulatory ceilings/restrictions on Capital Market Exposures, investment in Para-Banking activities and intra-group exposure,” said the circular.

What it meant was that banks were trying to convert Jet’s debt into shares at a price way below the market price, as negotiated and agreed with Jet management. But scrapping the circular meant that banks will have to engage in SEBI’s pricing formula that would require them to convert the debt into near market price. At a time when the shares are falling every day, it didn’t make sense.

“Now that the February 12 circular has been declared invalid, and no new circular has come to replace it, banks are on their own, which is not a good position to be in considering the Kingfisher experience,” said another banker.