Mumbai/New York: US investment house Goldman Sachs Group Inc. will invest $20 million, or Rs84 crore, in low-fare airline SpiceJet Ltd through equity warrants, in addition to an $80 million infusion into the company that will result from WL Ross and Co. Llc., a private equity fund from New York, buying out foreign currency convertible bonds from Goldman Sachs and Istithmar PJSC for an equivalent amount.
WL Ross, run by a billionaire businessman of the same name, has agreed to invest $80 million in two tranches, while Goldman Sachs will release 10% of $20 million immediately and the remaining over 18 months.
Until now, some $80 million, raised by SpiceJet for paying advance for aircraft purchase, was locked up in an escrow account based on collateral arrangements with Goldman Sachs and Istithmar PJSC that did not allow the money to be used. The Ross deal frees up that cash.
“This total investment of $100 million infusion will take care of airline’s capital requirements for the next two years,” a senior director on the airline’s board said. The director, who did not want his name to be disclosed, said the deal will not trigger an open offer as both the investors are not converting their bonds or warrants for the time being.
Another director said the airline, in consultation with new investors, has already appointed a head-hunter to spot a candidate to lead the firm, following the resignation of Siddhanta Sharma, the earlier chief executive.
The deal, first announced on 15 July, “will make SpiceJet a well funded company even in difficult times where carriers are struggling for funds,” Ajay Singh, a SpiceJet director, told Mint. “This will help us in emerging as a strong player in the market as we already have 10% market share.”
Dropping crude oil prices, which will reflect in lower aviation fuel rates, will help the company manage costs better in coming months, he added. Fuel costs account for up to 60% of the total costs of airline firms in India which are expected to make a combined loss of $2 billion mainly because of record fuel prices.
An email sent to Ross did not elicit any response.
With 15 Boeing 737 family aircraft, SpiceJet operates 94 flights daily to 16 cities—Ahmedabad, Bangalore, Bagdogra, Chennai, Coimbatore, Delhi, Guwahati, Goa, Hyderabad, Jammu, Kolkata, Mumbai, Pune, Srinagar, Varanasi and Visakhapatnam.
In a Monday communication to the Bombay Stock Exchange, or BSE, SpiceJet said its shareholders, including Royal Holding Services Ltd, Istithmar, director Ajay Singh and Goldman Sachs in their capacity as bondholders have entered into “definitive” agreement with WL Ross & Co.
Reacting to the news, shares of SpiceJet rose by 5.58% on BSE to close at Rs30.25 each.
Detailing the structure, the second director quoted above said WL Ross will buy out all bonds from Goldman Sachs and a majority of the holding of Istithmar’s, totalling around $68 million, for a consideration of $80 million considering interest accrued on the convertible debt.
Istithmar and Goldman Sachs had subscribed bonds worth $80 million holding $37.5 million and $42.5 million, respectively. “WL Ross will buy out $42.5 million worth bonds from Goldman and $25.50 million from Istithmar,” the director said.
Upon close of the transaction, Goldman Sachs will own only warrants while Istithmar will hold $12 million worth of bonds.
An analyst said the cash was the need of the hour for SpiceJet no matter how it came in. “The airline will benefit significantly with this fund infusion of $80 million, that was locked up in an escrow account,” said Sreesankar R., head of research, IL&FS Investmart Ltd.
In a 16 July report, Sreesankar has written that SpiceJet?was losing in excess of Rs1 crore a day. “...with accessibility to borrowed funds becoming both more difficult and dearer for aviation companies, we believe this $80 million infusion in the core business would be a strong sweetener in these cash-starved times,” the report added.
Asked when the first tranche of funds will come into the airline’s account, the second director said “in matter of days,” without giving an exact time frame.