“With approval of a bank-led resolution plan, Naresh Goyal will lose control of Jet Airways. But on the positive side, he may have saved Jet from becoming the next Kingfisher, at least for now”- Deepak Kaistha
- The Board of Jet Airways has been approved a resolution plan that was proposed by the consortium of lenders led by State Bank of India
- The plan will increase the shareholding of the lenders in Jet Airways to 51%, as Naresh Goyal loses control of the airline.
- Proactive action by lenders has helped avert the debacle at Jet, which was threatening to go the Kingfisher way.
- Jet Airways now has a realistic chance for a turnaround, considering that the fundamentals of the aviation sector are getting better.
The Rs 8,500 crore debt debacle seems to have been finally resolved for Jet Airways. The consortium of banks led by SBI will now become the largest shareholder of the company by converting a part of its debt to equity. Consequently, the stake of founder-chairman Naresh Goyal, who was initially opposed to ceding control, will now fall by nearly half. The plan has been approved by the Board but will have to be cleared by the shareholders on February 21.
Jet Airways released the following statement on the development:
“(The bank-led resolution plan) is to meet a funding gap of nearly Rs 8,500 crore, which is to be met by an appropriate mix of equity infusion, debt restructuring, sale/sale and leaseback/ refinancing.”
Meanwhile Jet Airways stayed in the red for the fourth quarter in succession, with a loss of Rs 588 crore in the quarter ending December 2018. In accordance with the RBI directive on companies with negative book value, banks will convert debt to equity at a price of Rs 1 and will be given 114 million shares.
The airline aims to increase authorised share capital to Rs 2,200 crore out of which Rs 680 crore will be equity capital and Rs 1,520 crore will be preference share capital. Subsequently, Eitihad, along with a local partner could take up fresh shares issued by Jet to increase its stake to 45%.
Moreover, the price per share could drop to around Rs 150 (shares closed at Rs 225.8 on Thursday) after the increase in share capital, which is incidentally the price at which Eitihad had initially agreed to buy Jet shares. After the restructuring, Naresh Goyal’s stake in Jet is expected to drop to 25.5%. Eitihad’s share will reach 12% and lenders will turn majority shareholders with 50.1%.
CAN THE JET ALBATROSS RISE AGAIN?
Jet Airways is a good case study for successful turnaround management. Alarm bells were already raised when Jet Airways was unable to pay December salaries to its senior management as well as pilots and engineers. Moreover, it has not been making timely payments to 15% of its 16,000 employees since August 2018. This was apart from other stringent cost control measures.
Bankers were quick to respond on Jet’s first payment default on January 1 and have proactively engaged with the management and stakeholders for a viable solution. Naresh Goyal has also taken the right decision to give up control, before the situation got worse.
Perhaps the Kingfisher debacle was playing on the minds of bankers, which instilled this sense of urgency in them. This is in stark contrast to the situation faced by Anil Ambani’s RCom, as Ericsson had filed an insolvency petition against the company way back in September 2017.
The resolution plan will go through several approvals, which will include the Ministry of Civil Aviation and SEBI. It remains to be seen who will take up additional stake to control the airline, since FIPB rules do not allow FDI beyond 49% in the Indian aviation sector.
However, with the plan to infuse equity falling into place, hopes of a turnaround have been revived. The skies are also looking sunnier for Indian aviation. With oil prices stabilising, aviation consultancy CAPA India projects that Indian airlines could bring their losses down by 2/3rd, from an estimated estimated US$ 1.7 billion in 2018-2019 to US$ 550-700 million for FY 2019-20.
You may want to read our previous coverage on the Jet Airways debt crisis below: