Take-off for Jet is still uncertain despite Etihad submitting a formal bid

A take-off for Jet Airways is still uncertain despite Etihad Airways submitting a formal bid. The many conditions linked to the offer made by the Abu Dhabi airline will make it an extremely tough resolution process for the lenders, people in the know said.

The primary conditions on which the bid depends include  conversion of debt into equity and finding a partner willing to pick a majority stake to tie up with Etihad. On top of that, lenders have to agree on a substantial haircut to their exposure. While lenders have indicated that they are not willing to take a haircut (estimated at around 60 per cent), experts pointed out that crossing the other two hurdles in a timely manner wouldn’t be easy either.

The Abu Dhabi-based carrier’s bid hinges on the ability of the banks to execute a conversion of the airline’s Rs 8,000-crore debt into equity. 

The resolution plan of Jet Airways, which underwent multiple changes, was structured around conversion of debt into equity and a rights issue to recapitalise the airline.

According to the plan, after conversion of debt into equity, the shareholding pattern was supposed to change, giving lenders 50.1 per cent and diluting Etihad’s stake to 12 per cent, after  which it would have invested Rs 1,450 crore to up its stake back to 24 per cent.

As part of this bank-led resolution process, shareholders of Jet Airways in February had given consent to issuance of 114 million shares to lenders.

However, the move was stalled after the Supreme Court quashed the RBI’s February 12 circular, allowing such conversions in companies with negative net worth.

“It’s paramount that this process goes through. In the absence of which, the resolution process can’t move an inch forward. However, we were not given any clarity on how and when it would be done in the absence of a formal circular from RBI. The new circular should come soon,” said a source close to the development.

Senior bank executives involved in the process said they had approached the RBI for a special provision for Jet Airways. It is learnt that RBI governor Shaktikanta Das had indicated they must wait for a new circular. “We can expect the new circular probably after the new government comes to power,” said an executive of a public sector bank.

Also, the availability of a partner willing to take a majority stake will not be easy. In its statement, Etihad made it clear that it will only be a minority stakeholder.

Sources pegged Etihad’s proposed stake at 24 per cent, so that open offer is not triggered. “Etihad re-emphasises that it cannot be expected to be the sole investor, and that, amongst other requirements, additional suitable investors would need to provide the majority of Jet Airways’ required recapitalisation,” the Abu Dhabi-based carrier said.

An estimated Rs 15,000 crore would be needed to restart operations, said an executive of a firm that has done due diligence for the airline.  This amount will be used for payment to operational creditors and vendors as well as for reimbursing passengers.

“The cost of recapitalising Jet is rising every day. Despite grounding operations, the airline has an expenditure of Rs 120-130 crore per month where it is not earning anything. There should be a large anchor investor willing to take the bet and also amenable to work with Etihad,” said another source. The sectoral policy, capping FDI of an aviation firm at 49 per cent, makes it more complex.

People aware of the development said banks, over the last one month, had sounded out multiple conglomerates including Reliance group, Hinduja group, ITC and Indian airlines like IndiGo and SpiceJet, but none was willing to bite the bullet.  

HDFC Securities analyst Deepak Jasani said that by every passing day losses and loans were rising at Jet.

"The process of bidding and finally getting control isn't so easy. As the process gets delayed, the situation becomes even more irreparable," he said.