RBI sympathetic to need for debt restructure but hardnosed on details.
The Reserve Bank of India is not inclined, say sources, to give Jet Airways a special relaxation on the rules regarding external commercial borrowing (ECB) to enable the latter to more easily restructure its big debt burden.
Jet has loan liabilities of close to Rs 14,280 crore, of which short-term debt is Rs 3,000 crore. Total unsecured debt is Rs 997 crore. A consortium led by State Bank of India had worked out a debt restructuring package.
The airline wanted to raise $750 million (Rs 3,200 crore) abroad to repay part of its short-term debt to Indian lenders such as SBI, PNB and IOB. The money raised would also help it take care of operational requirement and working capital loans to the tune of Rs 150 crore.
Sections of the government, including the department of economic affairs, had been agreeable, in principle, to relax the end-user norms and allow Jet to refinance part of its rupee debt by foreign borrowing. Jet’s management had independently written to RBI in July for permission to restructure the debt outside of the package the SBI-led lender consortium had worked out for the sector. As part of that, they had sought specific relaxations or “exceptions” of ECB guidelines.
No rule waiver
One of the key RBI reservations, said banking industry sources, is on allowing Indian banks to give guarantees for the ECBs that Jet is looking to raise overseas. abroad. According to Jet’s letter — reviewed by Business Standard — the ECB will have either fully or partially “unconditional and irrevocable guarantees” by Indian banks. In return, Jet has been willing to pay a “guarantee commission” to these Indian banks. The ECBs and the guaranteeing banks exposure will be secured by a charge on the credit card realisations outside India.
But in the wake of already high stress on the sector, many domestic lenders have expressed their apprehensions on such a move, as they fear that by giving guarantees for the ECBs, the risk would continue to remain on their balance sheets. “Let the ECB lenders take their own call. We, too, need to make commercial decisions,” said a domestic lender.
Second, Jet has also asked for a staggered maturity for their ECB borrowings over a one, three and five-year time line and has sought RBI’s exception to allow the average tenure of the ECBs to be less than five years. This, too, may not pass muster as traditionally the norms stipulate an average maturity of three years.
Jet has also asked for a coupon rate of upto Libor-plus 550 (basis points), which include the fees paid in foreign currency. If the entire $750-million sum gets Indian bank guarantees then Jet expects the tenor to come down to Libor-plus 350.
ECBs typically are governed by strict usage norms. For example, they cannot be used as working capital, the funds used for day-to-day operations such as paying salaries or to repay existing rupee loans. The regulator, acknowledging the ongoing stress on the aviation sector, has accepted that a one-time relief can be granted. But the specific relaxation that Jet has sought would mean further dilution of the norms, something RBI is not comfortable with.
“The ECBs will come handy for Jet, provided the foreign banks have appetite. Jet also has dollar income. Raising dollar debt will be a lot cheaper than raising money locally, but it will be really difficult for RBI to accept the Indian bank guarantee clause. It will open a Pandora’s Box,” said an aviation industry official. Jet officials could not be reached for comments.
Managed care
But in a move that will be beneficial for all, RBI seems to acknowledge that loans related to aircraft financing, which were traditionally viewed as “unsecured” by banks, be reclassified. Almost 85 per cent of the debt is backed by guarantees from the US Exim Bank or their European counterparts. Indian banks take exposure to the remaining 15 per cent, which remains subordinated.
“In case there is a default, the overseas lenders and the US Exim Bank will arrest the aircraft and sell it if required to recover their money, while Indian banks get negligible recourse,” said one of the bankers. This is the reason why most Indian aviation companies cannot be sent for credit restructuring programmes. Unlike manufacturing companies, aviation companies don’t have working capital loans against current assets. These are usually against receivables, making the debt unsecured. Recently, Jet raised Rs 1,500 crore in short-term loans from a consortium of state-owned banks such as SBI and PNB, against credit receivables.
RBI, after meeting the lenders, has also written to the finance ministry, detailing the financial duress of both Kingfisher Airlines and Jet. RBI had earlier also rapped the lenders, asking them to change their short-term lending outlook and devise debt restructuring packages for the cash-strapped airline companies. But it had also advised banks not to opt for individual deals and instead go for consortiums. They have also been told to take a decision based on the actual cash flows of the airlines and secure tangible securities or physical assets and desist from doing so on the basis of intangibles such as brand value and promoter guarantees.
