Jet Airways Rescue: Lenders Are Staring At A Catch-22 Situation

Late last week when State Bank of India Chairman Rajnish Kumar emerged from a meeting with Indian government officials on the resolution plan for Jet Airways (India) Ltd., he struck a confident note.

“We believe that it is in everybody’s interest that Jet Airways continues to fly,” Kumar told reporters, while assuring that bankruptcy proceedings remain the last option. “We will make every effort to keep Jet Airways flying.”

Behind that confident exterior, Kumar probably knows that stitching together a resolution plan for Jet Airways is an increasingly complex task.

Till a week ago, a bank-led resolution plan, which involved Jet Airways partner Etihad Airways PJSC, was still on the discussion table. Since then, Etihad has signaled that it would rather exit the partnership than step up its investment in Jet. With no resolution plan and no interim funding, at least 47 of Jet’s aircraft have been grounded for non-payment of dues. Meanwhile, working behind the scenes, is a government eager to avoid the collapse of an airline which employs more than 20,000 people.

As things stand, it looks like the government-owned banks will end up holding the bag. Jet Airways has a debt worth nearly Rs 10,000 crore. SBI and Punjab National Bank have the highest exposure to the airline worth nearly Rs 2,000 crore each.

What Will Lenders Do?

A meeting held by lenders on Friday to discuss the next steps was inconclusive. Talks are likely to continue at a meeting on Monday.

One of the immediate decisions facing banks is whether they can find a buyer for Etihad’s 24 percent stake. If not, should lenders buy out Jet’s partner investor?

While informing SBI about its decision not to participate in the restructuring plan for Jet Airways last week, Etihad had offered to sell its equity holding at a price of Rs 150 per share. With no new buyers on the horizon, the consortium of lenders is mulling the purchase of Etihad Airways’ stake, a person close to the development said, speaking on the condition of anonymity. This 24 percent stake purchase will be over and above the 11.4 crore shares that Jet Airways intends to allot to the lenders consortium as part of the debt-to-equity conversion.

Naresh Goyal, chairman and promoter of Jet Airways, has already agreed to step down from his position even though he could end up retaining some part of his stake in the company.

Together, this will put the lending consortium in control of Jet Airways. The lenders are also discussing the possibility of providing further loans to Jet Airways in the form of bridge financing, till a new equity partner is found. The funds would be crucial for the cash-strapped carrier, since the airline is yet to pay its employees and lessors. The lenders, who have the maximum exposure to the beleaguered airline, are meeting on Monday.

The Mechanics Of The Deal

Even if banks decide to take this route, the mechanics of the deal would need to be carefully thought through.

Section 19 of the Banking Regulations Act states that a bank may hold up to 30 percent of the paid up share capital of a company or stake representing 30 percent paid up share capital and reserves of the bank itself, whichever is lower.

If banks buy out Etihad Airways and take on the 11.4 crore shares issued by Jet Airways, the lending consortium will end up owning more than 60 percent in the airline.

SS Mundra, former Reserve Bank of India deputy governor does not believe this is a problem since the stake would be held by a consortium of banks. As such, individual banks may not breach any regulatory limits. “Banks could also hold the equity in a trusteeship,” Mundra said while speaking hypothetically.

There would still be the problem of periodic revaluation of the stake held by lenders. The shares bought from Etihad will need to be marked-to-market at regular intervals, said Mundra. The shares offered to lenders in lieu of the debt will however be valued at Re 1 in the investment books of banks, as per RBI guidelines on restructuring loans.

Lenders also need to decide on interim funding. If banks end up owning a majority in the airline, it would be in their interest to ensure its smooth operations in order to eventually find a buyer for the stake.

The Insolvency Route

Lenders have insisted that insolvency is the last option for Jet Airways but it can’t be ruled out.

The Indian carrier informed stock exchanges on Jan. 1, that it had defaulted on its loan repayments to banks. On March 31, banks would need to classify the account as a non-performing asset, as per the income recognition and asset classification guidelines of the RBI.

Lenders are permitted a total of 180 days from the first day of default to implement a resolution plan for large stressed accounts, failing which they need to refer the firm for insolvency proceedings.

But insolvency will not be an easy route for Jet Airways.

Apart from the fact that there is no obvious investor on the horizon, the nature of the airline business will also make the insolvency proceedings difficult.

Ajay Shaw, partner at DSK Legal said that if lease agreements for planes are cancelled due to non-payment of dues and employees move to other organisations, recoveries will be low. “The assets in an airline’s case would be the equipment (planes) and the people running the show. Without that, lenders may not find any tangible assets to attract new buyers under IBC. It is important then to have an interim arrangement where lenders control the operations for some time and look for a buyer,” Shaw said.

‘Damned If They Do, Damned If They Don’t’

Experts believe that lenders may have little choice but to take charge of the airline for now.

Anil Singhvi, managing director of Ican Advisors said that the best way forward for lenders would be to hire a specialist to run the airline and to protect their own interests along with Jet Airways.

However, lenders will struggle to find a new buyer soon as the Jet Airways is “a real mess,” Singhvi said.

Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services agreed that letting Jet Airways fail could be a mistake. “It is necessary for the banking system to do something that could help stabilise the company’s operations. If that requires them to take over majority equity and keep it running till they sell it to someone else, then that needs to be done,” Parekh said.