Indian carrier Jet Airways has proposed whole or partial conversion of the airline’s debt to equity and a 11-fold expansion of its authorised equity capital, from the current Rs 200 crore (US$28.12mn) to Rs 2,200 crore (US$309mn).
Abu Dhabi-based Etihad Airways holds a 24% stake in Jet Airways.
Jet Airways, in an official statement to Indian stock exchanges on Monday, said it will convene an extraordinary general meeting (EGM) on February 21 to seek shareholders’ approval for the plan.
The airways defaulted on loan repayment to a consortium of Indian banks led by State Bank of India (SBI). According to analysts, the move to convert debt and increase authorised capital is evidence that the struggling carrier has reached a consensus with SBI to restructure its debt and secure fresh loans.
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.
Lenders will also get the right to appoint one or more nominee directors or observers on the airline’s board, the Jet filing said.
“The announcement 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, opine that banks may still play 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.
Learning from the Kingfisher incident
Bankers are bound to move cautiously on the issue of debt conversion as they had their fingers burnt in the Kingfisher incident, in which debt conversion happened before the airline collapsed, an analyst with a rating agency said.
“As far as lending banks are concerned, Jet’s proposal for converting their debt – existing and future ones, into equity makes 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 the case of Kingfisher airline, banks committed the mistake of agreeing too early for the conversion. Having learnt their lesson, they are now unlikely to agree for such a thing, he said.
Institutions, including mutual funds, hold a 9% stake in Jet Airways, while promoters — the Goyal family — have 51% stake.
Jet Airways founder chairman Naresh Goyal is also in advanced stages of negotiations with Abu Dhabi-based Etihad Airways for increasing the latter’s stake in the carrier to 49% from the existing 24%. Jet management also wanted Etihad to infuse additional soft loans into the Indian carrier to help it tide over its current financial crisis.
In a statement issued recently, Jet Airways 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, meanwhile has said that lenders are considering a restructuring plan for Jet Airways.
“Lenders are considering a restructuring plan under the Reserve Bank of India framework for resolution of stressed assets that would ensure a long term viability of the company,” the SBI statement said.