The divestment of Naresh Goyal-led Jet Airways has met with another stumbling block. Abu Dhabi-based airline Etihad Airways, which has a 24% stake in the domestic carrier, is reportedly unwilling to infuse any funds in Jet operations until all stakeholders finalise and approve a bank-led resolution plan (BLRP).
Indias largest public sector lender, State Bank of India (SBI), is piloting the BLRP. But getting all stakeholders concerned to approve it will take time. In the meantime, the cash-strapped Jet Airways needs immediate funds to continue operations as well as pay off its vendors and aircraft leasing firms.
According to estimates, Jet Airways, which has a huge debt burden of Rs 8,052 crore, needs close to $500 million (Rs 50 crore) between now and April to meet repayment obligations and manage operating expenses.
At a meeting on Wednesday, helmed by SBI chairman Rajneesh Kumar, Etihads stance was conveyed to the bankers and Jet Airways board. Etihads CEO Tony Douglas and Jets chairman Naresh Goyal were also present, but no agreement was reached on procuring funds for the interim.
Stakes are high
This development arrives just after Goyal agreed last month to step down as chairman. With the completion of the BLRP process, Goyals stake in the airline could see a decrease of about 30% from 51%.
CNBC TV18 reported in January that Goyal and his wife Anita are ready to dilute their stake by as much as 35%; and Goyal has even agreed to voting rights on capping his stake at 10%.
With Etihad currently holding 24% shares in Jet Airways, the deal will likely raise its ownership to 49% in the expanded equity base, the most that foreign carriers can own in a domestic airline, as per Indian law.
BLRP: Outcome and obstacles
The BLRP is a mix of equity infusion, debt restructuring, and asset monetisation aimed at filling the funding gap of around Rs 8,500 crore; that includes proposed repayment of aircraft debt of around Rs 1,700 crore. To monetise Jet Airways assets, the BLRP may recommend sale, leaseback or refinancing of aircraft, among other things.
This would enable the consortium of lenders led by SBI to become the largest stakeholders in the airline.
But first, the consortium of lenders, the overseeing committee of the Indian Bankers Association, the board of directors of Etihad Airways, the promoter of Jet Airways, the Securities and Exchange Board of India, the Ministry of Civil Aviation, and the Competition Commission of India must approve the BLRP.
The final plan will be put in place by the end of January and the lenders are hopeful that the resolution plan will be in force by March 31; that is well before the 180-day period under the Reserve Bank of Indias February 12 circular,” said the first person cited earlier.
The circular said a resolution professional should be appointed within 180 days for defaulting accounts with aggregate exposure of ? 2,000 crore and above.
Jet Airways crisis
Jet voiced concerns last August about funding and asked its employees to take a 25% cut in salaries. Again, in September, the airline was o able to pay 84% of its employees; it, however, pledged to inject funds and cut costs by more than 20 billion rupees in two years.
The airline defaulted on its debt repayment on January 1, following which agency ICRA Ltd cut from C to D the long-term rating on loans and bonds issued by the airline, which has reported three consecutive quarterly losses of over ?1,000 crore each since the quarter ended March 2018.
After 25-year run, the countrys largest full-service airline by market share has now hit an all-time low by defaulting on pilots salaries and repayment of loans. In the face of a looming financial crisis, Goyal managed to rope in the Middle Eastern carrier, already the second-largest shareholder of Jet Airways, to invest in its equity and save the airline.
While the finer details are still being worked out, the broader contours entail that Goyal and Etihad will together infuse $450 million in the company, while the Indian lenders will restructure another $450 million of the airlines debt, which is up for maturity between now and March this year,” a source close to the development told Mint in January.
Latest updates
On Wednesday, all parties came around to agree with Etihad, in increasing the rights issue of shares to Rs 5,000 crore, from the originally proposed Rs 4,000 crore worth of rights issue, sources told the Financial Express. Both Etihad and NIIF are likely to put in Rs 1,800 crore eachGoyal will pay Rs 250 crore and the SBI-led lenders and NIIF will infuse the rest.
How can Etihad help Jet?
Etihad has reportedly agreed to increase its stake in Jet Airways and will bring in fresh capital to the company, while also conducting talks with several foreign investors who can refinance a large portion of Jet Airways debt.
The airlines existing rupee and dollar debt is headed for maturity over the next few quarters. With Abu Dhabi-owned Etihad gaining control, the Mumbai-based carrier will be more equipped to raise debt locally as well as from overseas.
The lenders have assured Jet Airways vendors and lessors that their dues will be cleared in three tranches till April; by then, the payment cycle should regularise. As part of the restructuring, the lenders have also proposed a moratorium on repayments on loan facilities due till April,” a source claimed earlier this year.
On February 7, Etihad infused the airline with Rs 252 crore by pre-purchasing tickets through its loyalty programme, Jet Privilege.
Why does the deal work for Etihad?
For Etihad, the deal makes sense from an investment perspective. Jet Privilege was sequestered from Jet Airways as an independent entity in 2014 after Etihad Airways PJSC bought a 50.1% stake for $150 million, valuing the firm at $300 million.
Last October, it further aimed to bring about financial restructuring and devised a support plan, which allows for Jet Privilege members to pre-purchase discounted mileage redemption seats from Jet Airways, thus providing Jet with a windfall of $35 million.
Thus, not investing further would result in an overall loss for Etihad, in the event of a full-blown setback to Jet.
Furthermore, if Jet Airways isnt resuscitated soon, it could also have a direct impact on Etihads direct feed of passengers; reason: 11% of Etihads passengers originate from India to overseas destinations. It could also intensify competition with Dubai-based rival Emirates, which flies about 18% of them.
Why it matters
Jet Airways is the largest airline on international routes to/from India, and it has a large network and numerous slots at key airports.
Its current plight, placed alongside the meteoric rise and fall of Air India and Kingfisher Airlines, paints a truly abysmal picture of India’s aviation industry.
The sector is in free fall, as a result of all the failures of the countrys economyfrom of political gains and bad coordination between the public sector and private to the market meltdown, a falling rupee and reliance on imported oil with a volatile price point.
The loss of jobs, failing industries, and tumultuous business climate will be important issues for the government to tackle in the run-up to the coming polls.
Prarthana Mitra is a staff writer at Qrius