Aircraft operated by Jet Airways India Ltd., foreground, and IndiGo, a unit of Interglobe Enterprises Ltd., are seen from a control tower at Indira Gandhi International Airport (IGI) in Delhi (Photographer: Prashanth Vishwanathan/Bloomberg)

Lenders On Edge As Negotiations On Jet Resolution Plan Drag On

Lenders to crisis-stricken Jet Airways Ltd are getting increasingly nervous as progress on finalising a resolution plan remains slow. The lack of a firm plan for equity infusion from promoter Naresh Goyal and partner Etihad Airways PJSC. has prevented any interim funding from being approved, forcing the airline to continue cutting back on operations.

According to at least three people in the know, a resolution plan which was circulated among all stakeholders earlier, is yet to receive approvals from Etihad Airways. Without the approval of the Abu Dhabi-based airline, the Jet Airways resolution plan could fail, pushing the Indian carrier closer to insolvency, these people said. Etihad Airways currently owns about 24 percent equity stake in Jet Airways.

Negotiations have come to a halt after lenders to Jet Airways, led by State Bank of India (SBI) and Punjab National Bank (PNB), sought a ‘right to recompense’ from Etihad Airways in lieu of the haircut that the consortium will take on its debt. Etihad is not prepared to agree to this, the people quoted above said.

‘Right to recompense’ is a right given to lenders as part of a company's debt restructuring plan. The right ensures that lenders recover any haircut they take on the debt over a period of time. Typically, the right to recompense is given to lenders when the equity value of the company has dropped due to restructuring negotiations and is invoked when the value goes up after the plan has been implemented. The right to recompense is also usually given if the current promoter of the company is expected to continue leading the firm after restructuring.

According to the people quoted above, Etihad Airways also continues to seek an exemption from the market regulator’s open offer requirements. The Indian takeover norms specify that for any investor that increases its equity stake to above 25 percent must announce an open offer.

If a resolution plan is not finalised within 180 days, lenders will have to refer Jet Airways for insolvency as per the Reserve Bank of India’s rules. So far, lenders have been trying to avoid this as they fear that there would be no takers for Jet Airways in its current state.

However, a senior official at State Bank of India, which is leading the negotiations, said that a resolution plan for Jet Airways is ‘work in process’ and a solution will be found soon. Lenders are looking for a ‘comprehensive’ solution and not taking a patchwork approach, this official said.

Queries sent to Jet Airways, Etihad and lead lenders SBI and Punjab National Bank were not answered.

Also read: Founder Naresh Goyal Agrees To Step Down As Jet Airways Chairman

Lenders Brace For A Hit

Unless the promoters of Jet Airways, partner Etihad Airways and lead lenders agree on a resolution plan over the next fortnight, banks are bracing for another hit as loans worth nearly Rs 10,000 crore given to the Naresh Goyal-promoted airline will need to be classified as non-performing.

On Jan. 1, Jet Airways informed stock exchanges that it had defaulted on debt repayment to its consortium of lenders. Under the Reserve Bank of India’s new stressed asset rules, discussions on a resolution plan must begin immediately. An account gets classified as a non-performing asset if a resolution plan is approved or if its 90-days overdue. Once declared an NPA, banks need to start provisioning against the account.

Jet Airways is one of the first few companies being resolved using the Sashakt scheme, which bankers devised last year. This allows a resolution plan to go through if 66 percent of the lenders approve a plan. Other lenders are given an option to sell their exposure as per inter-creditor agreements signed under the scheme.

The bank-led resolution plan for Jet Airways seeks to convert a portion of the company's nearly Rs 10,000 crore debt to long term equity like instruments, BloombergQuint had reported earlier. Under the plan, banks will be allotted 11.4 crore shares, making them the largest stakeholder in Jet Airways. Etihad Airways and Jet Airways' promoter Naresh Goyal were also asked to bring in equity into the airline as part of the plan.

Also read: BQ Exclusive | Jet Airways Resolution Plan: How Lenders Are Hoping It Will Work