Lenders Decide To Refer Jet Airways For Insolvency Proceedings

Lenders to Jet Airways (India) Ltd. have decided to approach the National Company Law Tribunal to initiate insolvency proceedings against the crisis-hit airline, according to a statement issued on behalf of lenders on Monday.

Jet Airways lenders met in Mumbai on Monday to discuss an offer put forward by Etihad Airways PJSC and the Hinduja Group. However, lenders were not prepared to accept the terms of the offer and decided to opt for insolvency proceedings instead, two people in the know told BloombergQuint on condition of anonymity.

Lead lender State Bank of India will approach the NCLT within a day, they said.

The lenders, in their statement, said that they have decided to seek a resolution under the Insolvency and Bankruptcy Code since only a conditional bid was received.

Emails were sent to Jet Airways and Etihad Airways on Monday evening. The story will be updated with any response.

The Final Push

The decision to use the IBC to find a resolution for Jet Airways was a consequence of extremely unfavourable terms offered by the Hinduja Group, the only remaining potential investor in the airline.

The Hinduja offer would have meant that the lenders would take a 95 percent haircut on their fund-based exposure to Jet Airways, said one of the people quoted above.

As part of their proposal, Etihad and Hinduja Group offered to settle lenders’ dues with a $300 million payout. Mubadla Investment Company, an Abu Dhabi-based investor, would take control of the aircraft owned by Jet Airways, in exchange for this $300 million settlement. The rest of the lenders’ dues would be written-off as part of the deal, the person quoted above said.

Operational creditors, which includes lessors as well as employees of Jet Airways, would receive $400 million against their dues of $1.3 billion. However, the Hinduja Group wanted lenders to negotiate with the operational creditors. Lenders were uncomfortable with this.

In addition, Etihad Airways and Hinduja Group would bring in $700 million in equity to revive Jet Airways, which has been grounded since April for non-payment of dues, the person quoted above said.

With the terms of Hinduja-Etihad offer unacceptable to lenders, Jet Airways' insolvency was the only option.

Jet Airways is already facing insolvency proceedings from two operational creditors, Shaman Wheels and Gaggar Enterprises. The Mumbai bench of the National Company Law Tribunal is expected to continue hearings on those petitions later this week.

According to Abizer Diwanji, partner and head of financial services at EY, an insolvency proceeding against an airline in India will not be easy for the system or the lenders.

“An aviation company is generally asset light. The assets are either leased or acquired through rights. Now if those leases and rights get terminated, then the value of the company is limited. Of course there is also the issue of accumulation of fleet and the people,” said Diwanji, explaining why bidders might find it difficult to invest in a grounded airline like Jet Airways.

How It Got To This

Jet Airways owes more than Rs 10,000 crore to its lenders and has been in default since January 1. SBI and Punjab National Bank are the largest lenders with close to Rs 2000 crore in loans to the beleaguered airline.

Lenders, led by SBI, had originally planned to enter into a restructuring deal with Etihad, which currently owns 24 percent stake in Jet Airways. However, that plan fell through due to Etihad’s stringent conditions. A round of bidding for the airline also failed after Etihad emerged as the only bidder. Etihad offered to maintain its 24 percent stake and left it to the lenders to find a majority investor.

Jet Airways had received three unsolicited bids, however, lenders have not found them to be serious, the people quoted above said.

With no access to additional funds, the airline was grounded earlier this year. Since then, it has lost some of its slots at airports across India and has seen its planes being repossessed by lessors. Senior management officials at Jet Airways also resigned over the last few weeks.

Jitendra Bhargava, aviation sector expert and the former executive director of Air India, said that the blame for the current condition of Jet Airways lies largely with the lenders of the company.

“There was a need for some out-of-the-box thinking in this case, rather than following some bureaucratic process of finding bidders...the banks faltered in it. They (banks) laid greater emphasis on salvaging their money than trying to revive Jet Airways. Salvaging money would not have revived Jet Airways, but reviving the airline would have ensured that the lenders got some of their funds back at some point in time,” Bhargava told BloombergQuint in an interview.