Jet Airways proposes debt-to-equity swap

Cash-strapped Indian carrier Jet Airways has proposed whole or partial conversion of the airline’s debt to the banks into equity and also an expansion of its authorised equity capital 11-fold to $309million (Rs.2,200 crore) from the current $28.12 million (Rs 200 crore).

In a filing with the Indian stock exchanges on Monday, Jet Airways, in which Abu Dhabi-based Etihad Airways hold 24 percent stake, said it will convene an extraordinary general meeting (EGM) on February 21 to seek shareholders’ approval.

Jet Airway’s move on debt-equity conversion and huge hike in authorised capital, is seen by industry analysts as evidence of the struggling carrier reaching an understanding in principle with the State Bank of India-led banking consortium for restructuring of its debt and issue fresh loans to it.

The company has sought “the consent of the shareholders… to convert the whole or part of the outstanding under loans, extended/to be extended by the lenders into shares or convertible instruments or other securities of the company as per the terms contained in the respective loan”, the carrier’s announcement to Bombay Stock Exchange said.

The lenders will also get right to appoint one or more nominee directors or observers on the airline’s board, the Jet filing said.

“The announcement (by Jet Airways) on seeking shareholders’ approval for a huge increase in equity capital and conversion of debt into equity shows a forward movement on its negotiations with SBI for a debt restructuring and sanctioning of additional loan,” the financial head of a leading Indian corporate house, who did not want to be identified, told Arabian Business.

Industry analysts, however, said the banks may still play a hardball with Jet Airways by insisting on highly preferential terms for themselves, including on the pricing of shares in the event of conversion, besides additional infusion of equity by the promoter or another investor, before agreeing on a debt restructuring plan for the airline.

Kingfisher lessons

Bankers are bound to move cautiously on the issue of debt conversion as they had their fingers badly burnt in Kingfisher Air of Vijay Mallya in which debt conversion happened before the airline collapsed, an analyst with a rating agency said.

“As far as the lending banks are concerned, Jet’s proposal for converting their debt – existing and future ones, into equity makes a strong sense commercially, as they can use this provision as a threat to change the management of the airline any time if it either fails to fulfil any of the commitments (proposed for the debt restructuring) or a loan default in future,” R Guha, finance director with Akzo Nobel India, told Arabian Business.

In case of Kingfisher airline, banks committed the mistake of going for conversion of their debt into equity upfront. Having learned their lesson, they are unlikely to agree for such a thing now, he said.

Industry analysts also see banks moving highly cautiously on Jet’s debt restructuring in view of the recent incidents of Indian probing agencies such as CBI slapping cases against former and serving top honchos of many of the public and private sector banks for their alleged favouritism or wrong doings in sanctioning of additional loans or restructuring of loans of some of the companies which have collapsed or their promoters fled the country subsequently.

Institutions, including mutual funds, hold 9 percent stake in Jet Airways, while promoters — the Goyal family — have 51 percent stake.

Jet promoter Naresh Goyal was also in advanced stage of negotiations with the Abu Dhabi-based Etihad Airways for increasing the latter’s stake in the carrier to 49 percent from the existing 24 percent. Jet management also wanted Etihad to infuse additional soft loans into the Indian carrier to help it to tide over its current financial crisis.

In a statement issued recently, Jet Airways had said it was working on a comprehensive resolution plan, including options on the debt-equity mix, equity infusion by various stakeholders and consequent change in the composition of the board.

It said the resolution plan was under discussion among stakeholders and proposals were yet to be crystallised.

SBI also said recently that the lenders are considering a restructuring plan for Jet Airways.

“Lenders are considering a restructuring plan under the RBI framework for resolution of stressed assets that would ensure a long term viability of the company,” the SBI statement had said.

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