End-game at Jet

The end-game seems under way at Jet Airways. With various fund-raising efforts coming to naught and its back to the wall, cash-strapped Jet Airways has convened an extraordinary general meeting on February 21 to seek its shareholders’ nod to convert debt into equity. Meanwhile, the airline’s precarious situation, after its debt default in December, has worsened with lessors moving to repossess planes for non-payment of dues. This has resulted in some of the airline’s planes being grounded and flights being cancelled. Whether Jet lives to fight another day might well depend on the success of its move to convert its debt into equity. If this gambit fails, the airline could find itself facing proceedings under the Insolvency and Bankruptcy Code (IBC). This could mean big haircuts for lenders and more so for shareholders — whether under a resolution plan that could keep the airline running in a restructured form, or under a liquidation plan that will see its closure.

Despite dilution in their stake, shareholders, including promoter Naresh Goyal and Etihad Airways, are likely to approve the debt-to-equity conversion to save the airline and salvage what remains of their investments. A bird in the sky is worth many on the ground. Lenders, though, will be faced with a tough choice — whether to pick equity stake in a tottering airline or take the IBC route to recover their dues. Their past experience with such a debt-to-equity endeavour has been hardly encouraging. In early 2011, many banks converted a portion of their debt in Kingfisher Airlines into equity at a significant premium to the then stock price — in the process, picking up about 23 per cent stake in the airline. By end-2012, Kingfisher Airlines had shut shop, sinking both the equity and remaining debt investments of the lenders. That said, lenders are likely to go along with the shares-for-loans conversion. For one, the Centre could nudge public sector banks that have lent the most to Jet Airways to accept the plan. With elections approaching, the Centre would be wary of the nasty optics of large-scale jobs losses and spike in airfares that would be caused by the grounding of India’s second largest airline. Rather than precipitating Jet’s demise, lenders may be better off taking the risk of picking equity stake, betting on the airline’s and its stock’s revival, and exiting at a profit in the future. A repeat of the Kingfisher episode appears unlikely, thanks to reforms in the institutional framework over the years — with the IBC for bad debt resolution and foreign investment being allowed in airlines. If the conversion gamble doesn’t pay off, lenders could consider the IBC mechanism to recover dues, or bring in new investment.

In any case, banks should consider a debt-to-equity conversion only to the extent needed for the airline to stay afloat. Lenders are in the business of lending, not in becoming equity investors.

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