Mumbai: Lenders to cash-strapped Air India are not happy with the debt restructuring plan formulated for the airline by merchant banker SBI Capital Markets Ltd (SBICaps), and some of them say they may insist on an early exit.
SBICaps, the investment banking arm of State Bank of India (SBI), presented the plan to select banks a fortnight ago. It has proposed a “deep restructuring” of Air India’s working capital and other short-term loans.
This includes converting Rs20,000 crore of loans into term loans of 10-20 years at a reduced interest rate.
Bankers are looking for a definitive “exit clause” from Air India.
Incidentally, a consortium of 13 lenders, including SBI and ICICI Bank Ltd, recently bought a 23.21% stake in Kingfisher Airlines Ltd, stopping short of gaining more say in the airline with a slightly enhanced holding. SBI picked up a 5.67% stake and ICICI Bank, 5.3%.
Kingfisher Airlines, India’s second largest by passengers carried, converted Rs.750 crore of its total debt of Rs7,000 crore into equity at a 61.6% premium over its share price. It allotted shares to lenders on 31 March at Rs64.48 a share.
The lenders will get one seat on the carrier’s board. It is not clear why they did not pick a 26% stake in the carrier, which would have given them more powers in terms of the right to block special resolutions and more board seats.
Kingfisher Airlines’ restructuring plan, too, was scripted by SBICaps.
“As per the restructuring plan (for Air India), at least 60% of the total working capital would be converted into a long-term loan and (the) remaining into cumulative preference shares with a 15-year duration,” said an Air India executive, who did not want to be identified. “Both of these will be backed by sovereign guarantee.”
A sovereign guarantee gives banks an assurance that the government will repay a loan if the borrower is unable to do so. Air India has a total debt of Rs40,000 crore, half of it in short-term loans.
“This will ease the liquidity pressure for Air India. Bankers are yet to get back to us with their final proposal,” the airline executive said.
Lenders are dubbing the recast plan as “unfavourable”.
“SBICaps has asked for converting the working capital loans into very long-term debts or instruments. It’s quite a deep restructuring and it is going to hurt banks,” said a senior executive at a bank that has lent to Air India.
“If we accept this, the net present value of the loans is coming down sharply...we will be required to make huge provisions,” he added.
Net present value is the difference between the present values of cash inflows and that of cash outflows. When banks make provisions or set aside money, their profitability is hit.
“It is now left to us (to decide) how much of it is acceptable...we will be looking at a well-defined exit route,” said the banker, who did not want to be named given the sensitivity of the matter.
Analysts say the new restructuring package is the last lifeline for Air India, which had to undergo a financial re-engineering to plug its huge interest outgo.
Air India has accumulated Rs13,300 crore in losses since its merger with Indian Airlines in 2007. It expects to turn profitable by 2014 with the help of its third financial restructuring plan, prepared by SBICaps and vetted by Deloitte Consulting India.
An exit clause for restructuring the unlisted Air India would involve a “put” option for banks at the end of five or seven years, which would give them the right to sell the loans to other parties.
“The onus will be on the airline to find a buyer for the loans to whom the willing bank can offload its debt,” said an analyst with a local brokerage. This would be in addition to having a charge on assets and the right to sell these at the first instance when the put option can be executed.
Mint reached out to five large banks for the story. Two of them said the terms of the restructuring were complex and not acceptable in the present form.
“It is not a small amount that we are talking about here. I will not comment whether we will agree to the terms or not. But the feelers I am getting from my people is that it needs to be reworked,” said a senior executive at a large bank, who did not want to be identified.
According to two bankers, including the one quoted first, banks are unlikely to carry on their books such a large amount if there is no sovereign guarantee as all the players in the airline industry are struggling to become profitable.
Though Air India claims to have a sovereign guarantee for its exposure, the finance ministry is yet to issue it.
The “airline industry is a very special case. We have to be very careful whenever any restructuring proposal comes. It will take some time before lenders come to an agreement”, said another banker, who does not have a working capital exposure on Air India, but has nevertheless seen the proposals by SBICaps.
Kapil Arora, partner (aviation practice) at audit and consulting firm Ernst and Young, said financial support from the government is vital in implementing any turnaround strategy for Air India.
“The restructuring package of private carriers cannot be strictly compared with a government-run airline. The critical enabler in Air India’s turnaround process is going to be government’s cash infusion and sovereign guarantee to its loans,” Arora said.