BQ Exclusive | Jet Airways Resolution Plan: How Lenders Are Hoping It Will Work
The math behind the bank-led resolution plan for Jet Airways.
As lenders to Jet Airways Ltd. embark upon an effort to resolve another large troubled asset, they are hoping to do it in a way that allows them to minimise the hit to their balance sheets over a period of time.
The attempt to restructure loans given to the airline outside the purview of the Insolvency and Bankruptcy Code comes against the backdrop of delays in resolution of large stressed assets and a fear that the company would see limited interest from investors at this stage.
On February 14, Jet Airways said that the board of the company had approved a provisional bank led resolution plan. As part of this plan, the company would issue 11.4 crore shares to lenders at an aggregate value of Re 1. According to two senior bankers in the know, the consortium of lenders are now engaged in discussions on how exactly to implement the plan.
Bank Led Resolution Plan
According to the two bankers aware of the discussions, who spoke on condition of anonymity, once the consortium establishes control over the company through acquisition of majority stake, they will approve a restructuring plan. The details of the restructuring plan will be as follows:
- The lenders will convert a portion of the company’s debt into cumulative redeemable preference shares (CRPS), payable over 10 years.
- Since this debt will be in the form of a long term instrument with a 0.01 percent return, it would effectively imply a haircut for the lenders at present.
- Eventually, if the company’s operations stabilise, lenders hope to sell the 11.4 crore equity shares they have been allotted in the open market or to another investor.
- The proceeds from the share sale would reduce the eventual haircut that the lenders take on the account.
- As for the portion of debt not converted into CRPS, the lenders will reschedule loans and restructure them to make it easier for the company to service them.
How Much Debt Will Be Converted?
The key question in all of this is how much debt will be converted into CRPS to allow the company significant relief on interest payments. The lenders are yet to decide on a final number, said the people quoted above.
However, experts say that the rule-of-thumb used to calculate sustainable debt is to keep the debt-to-EBITDA ratio at five times or below. On the basis of Jet Airways’ financials for the year ended March 2018, the company had a debt-to-EBITDA ratio of 10.5 times. This would mean that slightly more than half of the Rs 9,100 crore debt of the company would be seen as the ‘unsustainable’ part.
To be sure, the actual value of sustainable debt could change depending on various factors, including fuel prices, operational efficiency, interim financing, as well as infusion of fresh equity.
About Rs 2,500-3,000 crore of Jet Airways’ debt could stand converted to equity, Kapil Kaul, CEO-Indian Subcontinent and Middle East, CAPA India told BloombergQuint in an interview last week.
Lenders hope to eventually sell these shares at a price significantly higher than the acquisition price of Re.1. Any gains they make on this reduces the effective haircut taken by the banks. According to the closing price on Monday, the 11.4 crore shares, that Jet Airways will issue to lenders, would be worth a little over Rs 2,600 crore.
Apart from the conversion of debt to CRPS, banks may also provide emergency financing to Jet Airways at a reasonable rate, to stabilise the operations of the company, the people quoted above said.
Alongside banks, Etihad Airways will also be infusing equity into the airline. The plan may also involve bringing in an operational partner, to manage the operations of the company. Times of India, on Monday, reported that the National Infrastructure Investment Fund may buy stake in Jet Airways as well. BloombergQuint could not independently confirm this.
Promoter Naresh Goyal has already agreed to step down from the board and the management of Jet Airways, the people quoted above said.
What Could Go Wrong?
A plan that allows lenders to take over equity in an ailing company in the hope of an eventual recovery is not new.
Back in 2011, lenders to the now defunct Kingfisher Airlines converted about Rs 750 crore debt into 23.4 percent equity in the company. In that case, bankers converted debt to equity at a significant premium to the prevailing share price at the time. The plan was to eventually sell the shares once the operations of the company stabilised. However, about two years after the conversion of debt to equity, the airline was grounded and lenders had to initiate recovery proceedings against promoter Vijay Mallya.
Kaul believes things may not go in that direction for Jet Airways.
“We don’t see them holding the airline for long,” said Kaul while adding that this it is an interim arrangement before a new ownership order emerges. “For the interim, it is the best rescue package that could have been structured,” he said.
To be sure, the Jet Airways plan is yet to be approved by lenders.
The resolution plan is being worked upon under the Sashakt scheme, which could allow the larger lenders invoke inter creditor agreements (ICA) signed last year. As per this framework, once lenders holding 66 percent of the debt approve the plan, minority lenders can be asked to give their consent. If the minority lenders don't agree, they can sell their exposure to the majority lenders at 75 percent of the liquidation value of the company. It is not clear whether all the lenders in the Jet Airways consortium are ICA signatories.
After lender approval, the plan would require approval from the oversight committee of the Indian Banks' Association (IBA). It would also need shareholder approval at an extra-ordinary general meeting scheduled for Feb.21.