Lenders take big risk in converting part of Jet Airways' debt into equity

Banks did not make money in previous debt-to-equity conversions

Indian lenders are taking a significant risk in converting part of Jet Airways’ debt into equity because in about 20 similar cases before banks had been unsuccessful in making money. Many power projects where the debt was converted into equity are awaiting a sale.
 
Among the recent big accounts where the lenders converted debt into equity include Jaypee Power Ventures, IVRCL, KSK Mahanadi, Lanco and Kingfisher Airlines.
 
“While Kingfisher’s debt was converted into equity at a premium to the then market price of the airline, in the case of Jet the debt is converted into equity at the rate of Rs 1 as the airline’s book value per share is negative. It remains to be seen whether the banks would make money on their exposure,” said a bank official. On Friday, the Jet stock closed at Rs 232 a share.
 

Lenders said they were throwing a lifeline to Jet for strategic reasons because it connected different parts of India. “The airline has good assets in terms of landing slots all over the world. Once the airline finds its feet, the banks will be able to exit at a good price,” said the chief executive of a bank. In August, Jaypee Power Ventures (JPVL) announced the banks had decided to convert part of their debt into equity. The lenders included ICICI Bank, SBI, Punjab National Bank, Central Bank of India, Canara Bank and UCO Bank.
 
“A portion of the outstanding amount of debt (including unpaid interest) worth Rs 3,058 crore was converted into 305.80 crore equity shares of Rs 10 each at a price determined in accordance with the RBI circular,” the company in January as lenders took 51 per cent in the company. JPVL traded at Rs 1.56 a share on Friday on BSE.

 
Similarly, lenders had converted their loans to infrastructure construction firm IVRCL at a price of Rs 8.7 a share with a face value of Rs 2 in February 2016. The loans were converted under the RBI’s strategic debt restructuring scheme. After conversion, the lenders held 51 per cent in the company. As of today, IVRCL’s shares are trading at Rs 1 a share. This was after the company was referred to the National Company Law Tribunal (NCLT). With this, the banks are sitting on dud shares and did not get upside to their conversion.
 
“There are several smaller accounts where banks converted their debt but did not get any returns. It would be interesting to see how the banks are expecting to see an upside in future,” said a banking analyst. “Many power sector cases are awaiting a buyer after banks converted their debt in the Samadhan scheme.”
 
In July 2016, lenders took control of Lanco Infratech by converting part of their Rs 41,000 crore loan to the company into equity and taking 60 per cent in the company. This was after management consultancy firm EY came up with a valuation of Rs 5,300 crore for the company. 
 
Lanco was referred to the NCLT under the IBC 2016 and to date banks have failed to recover any money from the Hyderabad-based company. The case is still pending at the NCLT.