Lenders To Get 50.1% Stake In Jet Airways On Debt Recast

Jet Airways Ltd. agreed to give lenders a majority stake in the cash-strapped airline.

The board, as part of a provisional resolution plan, agreed to allot 11.4 crore shares at an aggregate value of Re 1 to the lenders’ consortium led by State Bank of India, according to the airline’s stock exchange filing. Through the conversion, the lenders will end up owning 50.1 percent in the full-service carrier.

“...under the RBI Circular, lenders can convert debt into equity at Rs 1 when the book value per share of a company is negative,” the Jet statement said.

The conversion will bring down Naresh Goyal and Etihad Airways’ stake by half to 25 percent and 12 percent, respectively, according to BloombergQuint’s calculations. The resolution plan allows the lending consortium to nominate members on the board.

The company called an extraordinary general meeting on Feb. 21 for shareholder approval for issue of additional shares.

While clearly this is a step in the right direction and will give Jet Airways a "new lease on life”, it is not the permanent solution, said Mark Martin, chief executive officer of Martin Consulting.

“One of the biggest challenges they have is that they need to get their operational setup aligned and re-look at how they had a complete network structure back in 2005,” he said.

The airline, which has a debt of over Rs 10,900 crore, defaulted on repayments and struggled to pay salaries as higher fuel prices and low fares in a competitive market left it short of cash. The new plan seeks to avail additional interim credit from domestic lenders.

Jet Airways estimates that it needs about Rs 8,500 crore, including Rs 1,700 crore for debt repayments, to stay on course. That will be met through equity infusion, debt restructuring, sale and leaseback, refinancing of aircraft, among other things, according to the plan prepared in consultation with lenders.

“The conversion will be extremely dilutive for existing minority shareholders. The funding gap of Rs 8,500 crore is virtually the entire debt which means that the entire debt of the company is unviable,” according to Ashish Shah, aviation analyst at IDFC Securities. “Conversion at Re 1 represents that there is no value in the company which is actually not the case.”

The lending consortium, oversight committee of the Indian Banks’ Association, board of directors of Etihad Airways and promoter Naresh Goyal will review the plan and give their final approval.

Bankers with direct knowledge of the matter, however, said that Goyal has agreed to step down from the board as chairman. They didn’t want to be identified as they are not authorised to speak to the media.