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Too many imponderables in Jet rescue plan

Among the questions lurking is who will commit funds into a firm with ₹7,242-cr. negative net worth

The more that things seem to change, the more they remain the same. The bailout of Jet Airways by its lenders finalised last week and approved by shareholders on February 21 is reminiscent of a bailout seven years ago of another high-profile airline that fell into bad times.

In an attempt to rescue Kingfisher Airlines, a consortium of lenders led by State Bank of India (yes, the same SBI which is now leading the effort to keep Jet Airways flying) decided to convert a part of its loans into equity. Thus, in April 2011, a sum of ₹1,303 crore, representing a third of the airline’s total dues of ₹4,263 crore to banks, was converted into equity.

The scandal, though, was the fact that the conversion happened at a premium of 61% to the then prevailing market price of the Kingfisher Airlines share. The SBI-led consortium agreed to convert its debt into equity at a price of ₹64.48 a share against the market price of ₹39.90!

Cut to the present. Banks have eased themselves into the pilot’s seat of Jet Airways, converting their dues into equity in the airline. Jet, which is reeling under losses for the last four consecutive quarters, has a debt overload of ₹8,414 crore (as of March 31, 2018) which includes terms loans from banks and dues to lessors for aircraft lease.

The airline and banks announced the bailout with much fanfare, but the crucial details have not been disclosed. How much of the banks’ dues have been converted into equity? As per the last audited balance sheet as on March 31, 2018, Jet owed ₹3,007 crore (₹2,797 crore term loan plus ₹210 crore loan repayable on demand) as secured loans to banks.

In addition, a sum of ₹2,121 crore has been grouped under current liabilities in the balance sheet under the head of “current maturities of long-term debt”. These are probably the overdues on loan repayment.

So, how much of this outstanding debt of ₹5,128 crore (₹3,007 crore plus ₹2,121 crore) has been converted into equity? And at what price? The answers to these questions will help us understand how harmful the bailout is for the lenders.

A small, back-of-the-envelope calculation will be useful here.

The banks have been issued 11.40 crore shares for a total consideration of ₹1, giving them a majority stake in the airline. Jet Airways’ share capital before the bailout was ₹113.60 crore divided into 11.36 crore shares of ₹10 each.

On February 15, the day the bailout was finalised, Jet’s share closed at ₹232.55. This would put the total value of the 11.40 crore shares issued by Jet to the lenders at ₹2,651 crore. This sum has a close resemblance to the overdue amount of ₹2,121 crore grouped under current liabilities in the balance sheet. It is also pretty close to the outstanding term loans of ₹2,797 crore from banks. So, have banks converted their entire overdues into equity? With neither the airline nor banks disclosing details, we can only speculate here.

Critical component

There are too many imponderables in the rescue plan that has been devised now. A critical component of the bailout is infusion of equity from a new investor, which may or may not be an airline. Which investor would be willing to commit his funds into a company with a negative net worth of ₹7,242 crore (as of March 31, 2018) and whose shares were down by over 60% in just one year?

There is also a rights issue envisaged besides sale of aircraft that is expected to fetch ₹3,000 crore.

As of now, at least five aircraft have been grounded by the airline, though media reports say that it could be as many as nine. How many more aircraft can the airline dispose off without affecting its schedules?

What is Etihad’s gameplan here? The Gulf airline’s stake in Jet will drop by half to 12% after the issue of shares to banks. Yet, the rescue plan envisages that it would double to 24% again after the rights issue. Has Etihad committed to putting in the required money?

Why not IBC?

The larger question here is why did the lenders decide to rescue the airline instead of referring it to the bankruptcy court as they have done in so many other cases? That would have been the less controversial of the two options and probably safer too. What happens if the rescue doesn’t work to plan? Dragging the airline to bankruptcy court later will cause a loss to banks which would then have been demoted to the status of equity holders.

The parallels here with the Kingfisher bailout are too similar for comfort.

Banks need to come out with full disclosure on the deal, as it is public money that is now being used to fund a private airline. With public sector banks assuming majority ownership of Jet, the airline now de facto becomes a government company and will remain so at least until the rights issue goes through successfully. This means that the Government of India now owns and runs two airlines — Air India and Jet Airways. Both loss-making, with an uncertain future.

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