By : Arijit Barman & Abhijit Le, Businessstandard.com
Meet end-July to agree more details, RBI keen on comprehensive package.
Based on Reserve Bank of India (RBI) instructions, State Bank of India, the country’s largest lender, and its merchant banking arm, SBI Caps, have prepared the broad contours of a much-awaited debt restructuring package for the aviation sector.
The RBI suggestions include conversion of short-term loans into long-term credit, additional equity infusion by airline promoters and partial conversion of outstanding debt into equity and preference capital. Though preliminary, it will set the agenda for further discussions among the top 13 banks who have the highest lending exposure to the cash-strapped sector.
It is expected that these initiatives will provide major relief for the sector’s ballooning debt. And, especially, help the three biggest carriers -- Air India, Kingfisher Airlines and Jet Airways. Between them, they control 65 per cent of domestic passenger traffic but have a combined debt of Rs 63,045 crore ($13.5 billion).
Three independent bankers privy to the developments told Business Standard that late last week, at a meeting in SBI, these points were discussed in detail among the 13 top lenders. The meeting discussed only the debt restructuring package of Kingfisher Airlines at length but the bankers believe it will set the basis for the bigger sectoral package.
“When we had first met Deputy Governor Usha Thorat in RBI on June 18 to seek assistance, the regulator made it clear that instead of providing relief to individual airline companies, it would prefer to review suggestions for a common sectoral package from the lender-consortiums. It was then left to SBI to take the initiative forward and last Thursday’s meeting was the first step towards that,” said a banker whose organisation has lent to these airlines.
After this meeting, these big lenders will now come back with individual suggestions and proposals after discussing these internally. And, finally, they will together hammer out a comprehensive debt relief package and then approach RBI for a special dispensation.
The bankers are expected to meet again in the next fortnight and take things forward.
“The first and the biggest beneficiary of the debt relief package would be Kingfisher. Its long-term and short-term debt has huge implications for the entire aviation and banking industry. Also, RBI specifically rejected a proposal to recast Kingfisher’s short-term debt. One can even argue some of the steps are tailor-made to help Kingfisher,” said a banker who had attended the meeting, on condition of anonymity.
SBI Caps is advising the ailing Kingfisher to restructure its Rs 7,413-crore debt (as on December 2009). Earlier, RBI had shot down SBI’s proposal to recast Kingfisher’s Rs 2,099 crore short-term debt. The remaining amount is long-term debt. For the year ending March 2009, the net loss of the airline was Rs 1,647.22 crore.
The first proposal, for example, asks for conversion of the short-term loans into long-term and then extending the repayment schedule to nine years, with a one to two-year moratorium. “The rescheduling of the repayment obligation is key, as different banks have different types of exposure. Some have given short-term debt, some long-term. The tenor and rates both vary,” said a banker. “So, the plan is to convert the short-term debt into nine-year, long-term debt and even look at reducing the interest rates.”
Repayment of loans now will further strain the balance sheets of the airlines, so the idea is to give them a breathing space for the next two years and then prepare the repayment timeline over the next seven, the bankers added.
Then comes the issue of additional equity infusion by the promoters. Banking sources say Kingfisher’s management told its lenders they planned to raise $250 million via a global depository rights issue. A rights issue by the promoters or a QIP (qualified institutional placement) is also being planned. This is part of a bigger $400 million fund raising exercise the airline has been planning for a while.
Bankers say when it comes to Air India, they are not sure if the government would like to pump in more money before it notices any sizeable turnaround. The bankers say they feel the government is clear that Air India should now generate more funds through better passenger yields and cost-cutting, instead of expecting further bailouts.
Debt, plus & minus
What is interesting, however, is the final point that has been suggested by some lenders. Converting part of the debt into equity and preference capital may act as a partial safeguard during distress, but most bankers are unlikely to favour such a move.
“We are not a private equity shop. We are a bank and we are comfortable with debt management. Managing equity means a lot of headache for us. Remember, unlike a PE manager, we have thousands of companies in our portfolio. Equity-linked responsibilities would mean a lot of extra time spent on one particular case and that’s unequal distribution of our time and effort,” said someone from a leading private sector bank. Moreover, conversion at this point will favour the promoters and not the lenders, he added.
It’s a delicate balance for the banks and the airlines that are in desperate need for a lifeline. The banks, too, want to stop own loans from turning bad, as it affects their profitability. A restructuring package would prevent the banks from setting aside money to make provisions for these bad loans. “It’s a win-win for all,” said the CEO of a private sector airline company, who did not want to be identified.
The challenge in Indian aviation, say bankers, is the fact that large chunks of the debt are unsecured. Take aircraft financing.
It’s the biggest piece and almost 85 per cent of that debt is backed by guarantees from the US Exim Bank or their European counterparts. Indian banks take exposure to the remaining 15 per cent, which remains subordinated. “In case there is a default, the overseas lenders and the US Exim Bank will arrest the aircraft and sell it if required to recover their money, while Indian banks will get negligible recourse,” said one of the bankers.
This is the reason why most Indian aviation companies cannot be sent for credit restructuring programmes. “These are not manufacturing companies. So, you don’t have working capital loans against current assets. It’s against receivables. And, that for us is unsecured debt,” said another lender.