Jet suitors ask lenders to settle for 80% haircut
No clarity on Jet's revival. Qualified bidders rapped banks for denying emergency loans.
“The investors are ready to provide funds. However, the lenders have made it overly challenging for any bid to work in the time frame required,” said a person close to the development.
“The lack of interim funding has forced Jet to shut operations. The lenders see this as an opportunity to expedite the sale process. But this does not allow time for adequate due diligence,” he added.
The lenders, led by State Bank of India, selected Etihad Airways, National Investment and Infrastructure Fund (NIIF), TPG Capital and Indigo Partners as the qualified bidders. They have to submit binding bids by May 10.
Etihad and SBI hadn’t replied to emails till the time of going to press. TPG and Indigo Partners declined to comment.
Jet has net debt of about Rs 8,500 crore on its books. Its dues to lessors and vendors add up to about Rs 3,500 crore. The potential investors have said they would only take on 20% of the airline’s debt.
“Jet’s value is plummeting every single day. Rather than foregoing the entire loan, which is what will happen if there is no investor, the lenders should be happy taking a 60-80% haircut,” said a person close to the situation.
Many Twists Ahead
The lenders have said they want to rework all lease and engineering contracts of Jet and bring down lease rentals by half. They plan to demand a significant reduction in maintenance reserves — the money that needs to be parked with a lessor — given that the aircraft will undergo wear and tear.
Even assuming all these cuts, investors estimate Jet will need up to Rs 20,000 crore over the next three years. This includes funding towards estimated losses, dues and investments in improving operations.
Jet, India’s oldest private airline, suspended operations Wednesday citing a failure to raise interim loans. The banks had assured Rs 1,500 crore to Jet but released just Rs 200 crore. A fresh request for Rs 983 crore was rejected. This decision too has been criticised by prospective investors.
Etihad has said it wants to retain its stake at 24%. While the bid document allows for a consortium of bidders, any grouping that Etihad forms with NIIF and/or TPG and Indigo Partners would breach the 25% shareholding limit that triggers an open offer for another 20% stake. Etihad has said it doesn’t want to be part of an open offer as that “may be used an exit strategy by minority investors” instead of fetching funds for the airline. NIIF doesn’t want its stake to go beyond 20%, said a person in the know.
“The lenders have told the investors to bid independently, which would actually mean competing bids. Then the lenders will come to an understanding on what each investor will own in the airline,” said a person close to the development. This had added to the confusion, he said.
Also, the bidding process largely hinges on a debt-to-equity swap which entails the issue of 114 million shares in exchange of Rs 1 of the airline’s debt. This would result in the following shareholding: 25.5% with Naresh Goyal, of which he will effectively control 9.5%, since he has pledged the rest (31.2% currently, but close to 15.6% after the debt-to-equity swap); 12.5% with the public; 12% with Etihad; and about 50% with the banks. Adding Goyal’s pledged shares, the banks can offer about 65.5% stake. However, this option has been stalled by a Supreme Court judgment that quashed the RBI circular of February 12, 2008, on debt restructuring rules.
While that is stalled, Goyal has agreed to pledge up to 41.1% of his shares, which can be sold by the banks. Even after that happens, the money will go to the banks, which would necessitate a fresh issue of shares to pump money into the airline.
“The investors basically have no clue what they are bidding for,” said the person cited above.