The livery of an aircraft operated by Jet Airways India Ltd. is seen on the tail fin as the plane prepares to land at Chhatrapati Shivaji International Airport in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

BQ Exclusive: Jet Airways’ Bankers May Move DRT If Bidding Process Fails

Lenders to Jet Airways Ltd. will likely stay away from insolvency proceedings if no buyer emerges for the airline before the deadline ends on May 10, said two people directly familiar with the matter.

Instead, lenders may approach the debt recovery tribunal (DRT) in an attempt to recover at least part of the Rs 10,000 crore in debt, these people told BloombergQuint while speaking on condition of anonymity. State Bank of India and Punjab National Bank are the largest lenders to the airline with an exposure of about Rs 2,000 crore each.

Discussions about a possible plan-B have begun after Jet Airways decided to temporarily suspend domestic and international flight operations starting Thursday. The decision followed the inability of the airline to secure emergency funding from its lenders. While banks, led by State Bank of India, had initially considered providing emergency funding of Rs 1,500 crore, the money was not released due to lack of consensus among bankers. All hopes now rest on a bidding process that it set to close on May 10.

An email was sent to SBI seeking details on Thursday evening. The story will be updated with any response received.

IBC vs DRT

According to the first person quoted above, a top banker at a large public sector bank, secured lenders to Jet Airways have decided not to opt for insolvency proceedings due to complexities of the aviation business.

However, if other creditors to Jet Airways opt to pursue resolution under the Insolvency and Bankruptcy Code, lenders will be forced to cooperate, the banker quoted above said.

According to the second person quoted above, deliberations between lenders and the Ministry of Civil Aviation had thrown up various challenges on using the insolvency route for an airline firm. Following those deliberations, lenders had come to the conclusion that attempting recovery using Debt Recovery Tribunals may be more effective.

Specifically, bankers and other experts involved in the meeting cited four factors that would complicate insolvency proceedings for Jet Airways or any other airline.

1. Cape Town Convention

The Cape Town Convention lays down an international set of rules governing the airline leasing and sale business. While India is not yet a signatory to the convention, the lessors to Jet Airways are.

As per the convention, if an airline defaults on repayment and is under insolvency, the lessors can take control of the planes that they have leased after an initial waiting period of two months.

This means that the moratorium imposed by the NCLT on all other creditors in an insolvency case may not necessarily apply to these lessors. If the lessors were to take away their planes in the midst of an insolvency proceeding, there would be little value left in the airline and it would have to be eventually liquidated, the second person said.

2. Status Of Lessors

Lenders are also uncertain about how the law would classify aircraft lessors in the insolvency process. These lessors could position themselves as financial creditors to Jet Airways, said the second person quoted above.

Should the tribunals accept that position, the lessors would have a larger say in the committee of creditors and the final outcome.

3. Airport Fees

If the airline is pushed into insolvency, lenders and the resolution professional in the company would be forced to pay the airport parking fees that Jet Airways incurs for parking its planes.

Previously, in multiple cases, resolution professionals have found it difficult to put together funds for such administrative fees. This could lead to further litigation and complication of the resolution process, the second person said.

4. Keeping Jet As A Going Concern

Various benches of the National Company Law Tribunal (NCLT) have been directing lenders and resolution professionals to keep bankrupt companies as ‘going concerns’ during the insolvency process. To do this, lenders will have to provide more money to the company in the form of interim financing.

In the current scenario, where Jet Airways has to pay its lessors, employees as well as oil companies to continue flying, lenders might find it difficult to foot the bill, even if for a short period of time.

Also read: Three Ways Jet Airways’ Shutdown Will Affect The Aviation Industry

The DRT Route

Given the difficulty in pursuing insolvency, lenders believe the next best option may be to pursue recovery using the DRT route.

While benches of the DRT have been actively hearing cases for many years now, the success rate is quite low. According to data compiled by the Reserve Bank of India (RBI), in the financial year ended March 2018, lenders were able to recover only Rs 7,200 crore from nearly 30,000 cases under DRT. The total debt owed by these companies was at Rs 1.33 lakh crore, which means that the rate of recovery has been at 5.4 percent.

Jet Airways owns 16 planes in its fleet and has some land available at Bandra Kurla Complex, where it has its office. The lenders are empowered to take charge of these assets and recover their loans, if they proceed through DRT.

The Bid Process

To be sure, the need to choose between the insolvency or the DRT route would only emerge if the bidding process fails.

State Bank of India has initiated a stake sale process for Jet Airways, where four bidders including TPG Capital, Etihad Airways, National Infrastructure and Investment Fund (NIIF) and Indigo Partners have all been issued bid documents, the first person quoted above said. The process of due diligence by these bidders is on and lenders are expecting final bids by May 10.

On Thursday, the lending consortium released a statement saying the stake sale process is the best way forward. Lenders said that they are “reasonably” hopeful that the bid process will be successful in determining fair value of the enterprise in a transparent manner.

Also read: What Jet’s Collapse Says About India