Kingfisher Airlines escaped, Jet Airways trapped! The cost of defaulting is Re 1

Everyone is talking about private carrier Jet Airways, and most importantly the new strategy of repaying debt the airline has defaulted on. The headline now in Jet Airways is that the second largest airline in terms of market share and among the most preferred jet to travel both international and domestic after Indigo, is now set to sell stake at just Re 1. Currently, Jet Airways market price is near Rs 232, but it is just moments away in welcoming new owners aka consortium of lenders whom the airline has defaulted, by repaying its debt by offering 11.4 crore equities at just Re 1. The odds are exactly 232 times lower than what Jet’s one share is priced at on exchanges. It’s a loss and tragedy on Jet’s front, but some good news for lenders which is led by SBI. Also debt-to-equity conversion is a ray of hope for investors faith in Jet, as new plan ensures faster recovery in crises.This takes back to the memory of another private carrier Vijay Mallya’s ex-Kingfisher Airlines. 

Fate of Jet Airways is similar like Kingfisher ones, when it comes to repaying debt. But interestingly, Kingfisher still escaped the new method of repaying debt in the form of debt-to-equity ratio, while Jet Airways is in some ways trapped, unless of course, the latter’s largest shareholders Naresh Goyal and Etihad Airways play some magic in funding. 

The issue! 

Jet has to pay a net debt of about Rs 7,299 crore ($1 billion), it has started to default in repayment from December 2018. Real reason shortage of cash! Jet has not revealed its cash data in both Q3FY19, but it did post about Rs 357.96 crore cash and cash equivalents in its financial audit report of  September 2018. When Jet began to default on debt on series of scheduled deadline, there was hayway created among investors, markets, experts and the airline’s own employees who did suffer last year from August 2018, when the carrier began to also default on salary payment. 

More fuel in Jet's woes were added due to rising aviation fuel turbine (ATF) cost, which made it almost impossible to record any profit in books. Then rising expenditure also took toll from lease rentals and other expenses. Hence, Jet pocket was getting empty more than what it was receiving from flying. 

Since then news have emerged that, Jet’s Goyal also knocked doors of biggies like Ratan Tata’s Tata Group and Mukesh Ambani’s Reliance Industries. But not much development was witnessed. Later, it was agreed to allow SBI in leading the consortium of banks whom Jet owes to construct a debt restructuring plan.

The resolution plan! 

Last week, a new plan was accepted by Jet Airways board presented by a Bank led Provisional Resolution Plan (BLPRP). 

The BLPRP proposed to convert debt into equity. They will convert Jet Airways debt into  11,40,00,000 shares of Rs. 10/- each by allotment of such number of equity shares to the Lenders that would result in the Lenders becoming the largest shareholders in the Company.  The cost of converting debt to equity is set at a consideration price of Re 1. While lenders will nominate their own members in Jet Airways board of directors. Also, sanction of appropriate interim credit facilities by domestic lenders on terms to be agreed.

All eyes will on Etihad and Naresh Goyal

With this all eyes will now be on Etihad and Naresh Goyal, as they both have the largest holding in Jet Airways and hence they are the ones who will lose the most. 

Currently, Goyal holds about 5,79,33,665 equity shares in Jet Airways - which is 51% of the airline’s share capital as on December 2018. The second holder is Etihad who has 24%. Buzz is that, after the resolution plan, both the shareholders will see their holding down in half, which means Goyal’s holding will become 25.5% and Etihad’s by 12%. 

Recently, a Bloomberg report highlighted that, a healthy Jet Airways would feed traffic to Etihad’s base in Abu Dhabi, flying west-bound Indians to the U.S. and Europe. The Abu Dhabi-based airline has slashed orders worth $21.4 billion for Boeing Co. and Airbus SE jetliners, after a strategy of buying into sick airlines around the world backfired. 

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Jet Airways vs Kingfisher Fate! 

Debt restructuring via debt-to-equity was carried by lenders way back in 2011 with Kingfisher Airlines. But here, the lender took forward the exercise at a 60% premium. 

Simply put, they debt into equities at Kingfisher, for a consideration price of Rs 64.48 on April 07,2011, compared to the airline’s market price of nearly Rs 40. KFA had defaulted on over Rs 7,500 crore debt to a consortium of 17 banks which was also led by SBI. Mounted by heavy debt, KFA had to suspend operations from cities like Kolkata, Hyderabad, Patna, Lucknow, Thiruvananthapuram and Bhubaneshwar in March 2012. The operation was lowered to 120 daily flights in this time, from previous 400.

Recovering KFA debt is still an ongoing procedure, as Mally made the situation worse by fleeing to UK. Banks, Indian government are still fighting the case.

For Jet - RBI was game-changer! 

Re 1 debt to equity conversion became reality from last year, when RBI passed a resolution guidelines for banks and defaulters. 

In February 12, 2018, RBI revised the resolution plan framework, where it says, Book value per share to be calculated from the audited balance sheet as on March 31st of the immediate preceding financial year (without considering 'revaluation reserves', if any) adjusted for cash flows and financials post the earlier restructuring, if any. The balance sheet shall not be more than a year old. In case the audited balance sheet as on March 31st of the immediate preceding financial year is not available the total book value of the borrower company shall be reckoned at Re.1.

However, RBI does allow negotiation in price during conversion, but must not be lower than the fair value. Here - Book value per share to be calculated from the company's latest audited balance sheet (without considering 'revaluation reserves', if any) adjusted for cash flows and financials post the earlier restructuring, if any.

Hence, Jet needs funding to boost its cash reserves. Although, the new resolution plan does not reveals how much debt will be converted with Jet’s equities, however, it is aimed in raising about Rs 8,500 crore to meet funding gap and some dues. 

A meeting will be held on Thursday, among Jet Airways promoters, Etihad’s board of directors and consortium of banks to discuss the new development. It would be interesting, to know if Goyal and Etihad decides to infuse further cash in Jet, or they both come to an agreement with BLPRP.