Will Jet continue to fly?

If Jet does not survive, the lenders will lose money but gain experience of how to deal with a defaulter airline and not repeat the Kingfisher mistake

On Thursday night, after Kolkata Knight Riders vanquished Royal Challengers Bangalore at an Indian Premier League match when Andrew Russell smacked his seventh six, Sunil Gavaskar said this was a classic instance of snatching victory from the jaws of defeat.
 
While watching the match in the evening on TV, I got many text messages from executives of Jet Airways (India) Ltd, giving a running commentary on how Indian Oil Corp Ltd stopped supplying aviation fuel to the airline that day and resumed later and its lessors were asking the India’s aviation regulator to deregister planes leased to Jet for non-payment of lease rental. (Once they are deregistered, the lessors can take them out of India and lease to other airlines.)
 
All these were happening when a gr­oup of bankers was huddled at State Bank of India's local head office in Delhi, stitching the plan to put up the airline for sale. Can the lenders snatch Jet from the jaws of death? The clock is ticking away: Within 72 hours we will know whether Jet will survive or go the Kingfisher Airlines way.
 
Even if Jet crashlands, a la Kingfisher Ai­r­lines Ltd, the two stories are very different.
 
Wiser with the Kingfisher experience, the lenders have been proactive. They have forced the promoter Naresh Goyal out. Contrary to what many believe, they have not been trying to bail out the airline. By infusing little bit of fresh money, they want to sell it as a “going concern”.
 
The lenders have not moved the insolvency court as an airline is not just another borrower; barring the enterprise value, an airline doesn’t have many assets that can fetch money. Of course, if the revival plan fails, they will have no choice but to perform the last rites of Jet by moving court under the Securitisation and Recon­s­t­r­u­ction of Financial Assets and Enforcement of Securities Interest Act, 2002, or SARFAESI Act, to recover whatever they can.
 
By October 2018, when the 25-year old and till then India’s second largest carrier Jet reported losses for the third straight quarter, the lenders had swung into action by writing to its promoters for a Rs 4,500-crore fund infusion.
 

Goyal did not come forward and, in January, when the airline for the first time defaulted in its payment to the borrowers, the lenders decided to go for a bank-led resolution. Under the now-set aside 12 February 2018 Reserve Bank of India directive, banks need to act at the very first default, declare the account as bad asset and try to resolve it before going in for liquidation.
 
Compelled, Goyal ultimately “sacrificed” his “every control and interest” in the airline but all along he had failed to see the writing on the wall. Unlike say Kapil Wadhawan, promoter of the beleaguered Dewan Housing Finance Corporation Ltd, who has been selling assets left, right and centre to revive the company, Goyal was refusing to move out even though the lenders made it clear to him that no new money would flow in till he leaves.
 
Deep-rooted mistrust between Goyal and his partner, Abu Dhabi’s Etihad Airways PJSC also contributed to the delay in the airline’s revival plan. By end of February, when the lenders finalised the resolution plan, Goyal moved out but Etihad declined to play along.
 
What are the salient features of the rather complex resolution plan?
 

• The lenders would own 50.5 per cent of Jet equity for Rs 1.
• They would infuse Rs 1,500 crore in the form of non-convertible debentures — a 10-year zero coupon bond. (Going by the so-called net present value, the lenders wo­uld have lost around Rs 1,200 crore follo­w­ing this arrangement but that could ha­v­e been offset by the upside from equities.)
• The existing fund exposure of the lenders to Jet would be restructured for a 10-year loan.
• Etihad would bring in around Rs 1,800 crore equity.
• A few other investors would also bring in new money. India’s first sovereign wealth fund National Investment and Infrastructure Fund (NIIF) could be one of them.
• Goyal’s stake holding would come down to 17 per cent.

 
At its 10 March board meeting, Etihad put a spanner in the revival plan by declining to support it. I don’t know the details but what I gather from many familiar with this is Etihad did not want Goyal to have even one board seat.
 
By that time, HSBC also made a claim of $140 million from Etihad as the facility was guaranteed by it.
 
The airline also wanted more sacrifice by the lenders.
 
The revival plan envisaged around Rs 10,500 crore fresh fund, half of which ne­e­ded to come in the form of equity but, fo­l­lowing the delay, the required sum now co­uld have gone up to Rs 13,000 crore. With ev­ery passing day, the cost of revival is soaring.
 
Invitation for expression of interest (EoI) from the prospective bidders, which is expected to close on 10 April, is the proverbial last ditch attempt to save Jet. It is also the lenders’ way of looking for price discovery — how much they can recover from their dues. The exposure of a group of banks, including Mashreq Bank but excluding HSBC, is around Rs 6,600 crore. On top of that, Jet Airways owes to its operational creditors around Rs 4,500 crore.
 
I guess, the lenders will be happy if th­e­y get back around 30 per cent of their mo­n­ey; ditto with the operational
 
creditors. This means, if the new investors can bring in around Rs 3,500 crore, Jet will be saved.
 
Of course, they would need to arrange more money to run it. Efforts are on to woo Etihad back to the Jet cockpit. It makes sense for the Abu Dhabi-based airline to bid for Jet after making close to $4.8 billion losses in three years. Also feed of west bound traffic from Jet flights to Abu Dhabi into Etihad’s long haul network is valuable. Private equity fund TPG Capital, Indigo Partners and NIIF may come as financial investors. If Etihad expresses its interest by 10 April and lenders are convinced about welcoming it on board, the financial investors can walk in by 30 April.
 
By that time, the lenders will also get c­larity on the conversion of Jet’s debt into e­q­uity. The RBI directive which allowed ba­nks to convert debt into equity at Rs 1 is no more valid but India’s capital market re­g­ulator’s  Issue of Capital and Disclosure Re­quirements (ICDR) norms allow banks to do such capital restructuring with the ba­nking regulator’s nod. It may take a few days but does not come on the way of pr­o­spective bidders expressing interest in Jet. If indeed Etihad and others step in, Jet will survive. If it does not happen, India will witness the second airline crash in seven years, adding to the woes of unemployment and joblessness in Asia’s third largest and world’s fastest growing major economy.
 
To be sure, the lenders have tried their best to revive Jet and protect their interests. At Jet’s 21 February extraordinary general meeting where an enabling resolution was passed for the conversion of lenders’ debt into equity, it was also decided that the overdue payment of US Exim Bank would be cleared to get the so-called first charge on four of the 13 aircraft that Jet owns (the rest are on lease). This means, when they are seized and sold, Indian bankers will get the money.
 
The lenders also forced the promoter to pledge part of his shares as security to the banks, converting the so-called non-disposable undertaking that Goyal had given earlier. They also own more than one-third of Jet Privilege Pvt Ltd, an independent, loyalty and rewards management company formed in 2014, post the strategic alliance between Jet Airways and Etihad Airways.
 
This case is redefining the way stressed assets are handled. If Jet does not survive, the lenders will lose money but gain invaluable experience of how to deal with a defaulter airline and not repeat the Kingfisher mistake.

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The columnist, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd. Twitter: @TamalBandyo