Mumbai: Creditors of debt-laden Kingfisher Airlines Ltd are preparing to take a hard line towards its founder Vijay Mallya and may consider invoking personal guarantees the liquor tycoon gave in return for bank loans unless he offers a firm commitment to infuse fresh funds into the grounded airline, people familiar with the situation said.
Banks have toughened their stance after Mallya said this week that he would inject £50 million (around Rs.440 crore) into his Formula One racing team, Sahara Force India. Mallya’s announcement followed an agreement by the world’s largest distiller Diageo Plc, earlier this month to buy a majority stake in his United Spirits Ltd for Rs.11,166 crore.
“Now that Mallya has money, he should pay us first instead of investing in his other interests,” said a senior banker, who did not want to be named.
The banker said various creditors are in touch with State Bank of India (SBI), which heads the consortium of lenders to Kingfisher Airlines, and their boards are discussing measures that can be taken to recover their loans. The consortium of lenders will meet before 30 November.
Invocation of personal guarantees is typically the last resort for creditors. According to the latest annual report of Kingfisher Airlines, guarantees offered on behalf of the airline by promoter group companies for loans and other liabilities are pegged at Rs.8,925.86 crore. The value of the personal guarantees given by Mallya isn’t known.
A senior executive at Mallya’s UB Group said he was not aware of any move by bankers to encash guarantees offered by the promoters.
“We are clear about our strategy. We will not be dumping Kingfisher Airlines after investing (a) lot of money,” this executive said. “We are in talks with strategic investors, including private equity players. The promoters are willing to infuse funds. But I cannot divulge details at this point of time.” The executive requested anonymity.
Prakash Mirpuri, spokesperson at Kingfisher Airlines, said: “We are in discussion with the bankers’ consortium for recapitalization and restart of operations and there is therefore no question of jumping the gun and invoking any guarantees.”
The UB Group has provided at least Rs.750 crore to the airline to meet cash flow requirements, the carrier had said in August.
Kingfisher Airlines has pledged assets ranging from its brand name to office furniture for Rs.6,400 crore of bank loans. The assets, including a villa in Goa, the Kingfisher House building in Mumbai, shares and two helicopters, have been shown as collateral for loans as of November 2011, minister of state for finance Namo Narain Meena told Parliament in December.
“The next consortium meeting will be important. I don’t think we would like to see Mallya asking more time,” said the banker cited above.
Legally, there should not be a problem if the promoter of a troubled company invests in one of its affiliates. But Mallya’s proposed investment in Sahara Force India has not gone down well with most of the creditors of Kingfisher Airlines.
“In our last consortium meeting we decided to act tough to recover our dues, but now that the promoter has got money, we would like to see some firm commitment from his side,” said another senior banker, who also did not want to be named because of the sensitive nature of the issue.
Kingfisher Airlines, which hasn’t shown a profit since its inception in 2005, has $2.5 billion (around Rs.13,825 crore today) of liabilities, of which $1.1 billion is bank debt. Banks may be able to recover some of their money depending on the quality of the collateral in place, but this is likely to be a long-drawn process and risks are inevitable, the Centre for Asia Pacific Aviation (Capa), a consulting firm, said in a recent report.
The remaining $1.4 billion of liabilities to vendors and employees are largely irrecoverable except for some secured debt where airport operators and oil companies hold bank guarantees that could be invoked.
The Director General of Civil Aviation suspended the licence of Kingfisher Airlines on 20 October. The suspension will only be revoked once the airline submits a comprehensive revival plan before the regulator.
“The account is already an NPA (non-performing asset), and the viability of the airlines business has come in doubt after its licence was suspended. We have enough collateral with us and we would want to exercise our rights. We are in touch with State Bank of India on the issue, and it all depends on what the consortium leader decides,” said a third banker, who also spoke on condition of anonymity.
SBI officials declined to comment on the matter.
Employees of Kingfisher Airlines, mainly engineers and pilots, who had gone on an indefinite strike starting 1 October, resumed work on 25 October after reaching a settlement on payment of salaries.
On 26 October, Mint reported citing Kapil Kaul, chief executive officer (South Asia) at Capa, that Kingfisher Airlines needed at least $1 billion to fully fund a turnaround business plan. The immediate requirement for actively re-launching the airline—as opposed to operating a skeleton fleet—has also increased from $600 million earlier to closer to $700 million, Capa said.
The 9 November deal with Diageo offered Mallya a way out of mounting debt woes. For the UK-based spirits maker, the stake purchase in United Spirits ensured a strong presence in the growing Indian liquor market.
The deal, however, will not directly help Kingfisher Airlines.
In a conference call after the deal with Diageo, Mallya said it would be “unfair for me to comment now what this deal means to Kingfisher”.
“I am doing what is best for my businesses,” he said. “I believe that I have done what is best for my spirits business. I will be doing what is best for Kingfisher Airlines separately, and I would be doing (it) fairly and squarely.”