One day in the last week of December, Vijay Mallya , the flamboyant chairman of the UB Group, met bankers at a south Mumbai hotel.
Mallya—known as much for his love of the good life and the popular Kingfisher calendar as for Kingfisher beer, India’s largest selling brew, and the grounded Kingfisher Airlines Ltd—was accompanied by Sanjay Aggarwal, chief executive of the airline; Ravi Nedungadi, president and chief financial officer of the group; and A. Harish Bhat, deputy president, corporate finance.
The always-articulate Mallya made a PowerPoint presentation in which he meticulously charted the future of the airline, the licence of which was suspended in October by the Directorate General of Civil Aviation (DGCA), India’s aviation regulator, following a strike by the airline’s employees. The airline’s operating licence has since expired.
According to the proposal presented by Mallya—based on a revival plan submitted by the airline to DGCA—Kingfisher would restart operations with seven aircraft and increase it to 21 in four months. At its peak, Kingfisher Airlines was flying 66 planes to 68 locations, including eight international destinations, with 374 flights a day, and accounted for 20% of the market.
Mallya’s audience—representatives of a consortium of 14 banks that have a Rs.7,000 crore exposure to the troubled airline—gave him a patient hearing. At the end of it, one of them asked Mallya a question: what’s in it for the lenders? Mallya didn’t have an answer.
Still, the meeting wasn’t entirely unproductive. It ended with the formation of a core group to assess the airline’s proposal to restart operations and identify ways for lenders to recover their money. The members of the core group are State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda, Bank of India, IDBI Bank Ltd and United Bank of India.
The group met in Bangalore on 4 January but made no headway. With Diageo Plc of the UK buying a 27.4% stake in UB Group company United Spirits Ltd for £660 million (this will be followed by an open offer to buy another 26% from the public shareholders of United Spirits), the bankers went into that meeting hoping Mallya would come up with a concrete plan to take care of their interests.
Their belief was strengthened by an offering Mallya made on 18 December, his birthday, at Hindu god Venkateswara’s shrine in Tirupati in Andhra Pradesh—3kg of gold worth close to Rs.1 crore.
But Mallya did not oblige.
The core group will meet again in Mumbai on 18 January, possibly to take a final call on the money owed by Kingfisher Airlines—arguably the most high-profile bad asset Indian banks have ever had on their books.
The banks can’t be blamed; if anything, they have been far too patient and much too generous.
They first restructured Kingfisher’s debt in November 2010. To infuse life into the airline, ailing even then, banks in the consortium converted Rs.1,355 crore of debt into equity, at a 61.6% premium to the market price of Kingfisher Airlines’ stock. Following this, banks own 23.21% of the airline’s equity. The promoter, too, converted Rs.648 crore of debt into equity. Apart from this, the bankers also stretched the period of repayment of loans to nine years with a two-year moratorium, cut the interest rates, and sanctioned a fresh loan.
The idea was to bring down the debt of the airline, push up its equity-debt ratio, and improve its cash flow. Since its inception in 2005, Kingfisher has never returned a net profit. And its losses zoomed after it acquired low-cost airline Deccan Aviation Ltd in 2007. Between fiscal 2008-09 and September 2012, its accumulated losses reached Rs.8,015.8 crore.
The bankers agreed to throw good money after bad money in the belief that this would improve the health of the airline and ultimately help them recover their dues. Now, they regret it.
Interestingly, some of them admit there were more than just commercial interests at play in their generosity. In private, some bankers hint at pressure from certain quarters to restructure the loan. Mallya has been a member of the Rajya Sabha, the Upper House of India’s Parliament, since 2002.
Still, whatever forces may have been at work, the bankers insisted on a safety net.
Since most airlines lease aircraft, banks do not get planes as primary security for loans given to airlines. So what do the bankers have as collateral? They took fresh collateral from Mallya during the restructuring—two properties in Mumbai and Goa worth Rs.70 crore, two helicopters worth Rs.84 crore, and shares of United Spirits and Mangalore Chemicals and Fertilizers Ltd worth Rs.450 crore at current market prices. They also took the first charge on fixed assets such as coaches that ferry passengers to the tarmac and tractors, worth Rs.150 crore. In case of a default, lenders with a first charge have the option to seize the assets.
The banks also received a corporate guarantee from United Breweries Holdings Ltd, the holding company of the group, and a personal guarantee from Mallya. Finally, they also took as collateral the Kingfisher brand, valued at Rs.3,000 crore by audit firm Grant Thornton India.
In an indication of the kind of sway he once exerted over the bankers, Mallya charged the banks Rs.98 crore for offering a personal guarantee. Once the banking regulator Reserve Bank of India (RBI) got to know of this, it asked the banks to recover the money. The amount was initially debited from Kingfisher Airlines’ liability to banks in its 2010-11 profit and loss account, but the next year the entry was reversed, thus doing away with the fee. Now, the banks seem determined to take their dealings with the airline to their logical end—one that could well mean the end of the airline, too.
Mallya is willing to bring in money to make the airline operational and have a limited restart in the summer of 2013. In a 10 January letter to employees, he promised to infuse Rs.650 crore to do this. The money will come from the UB Group and its associates. Among Kingfisher’s dues are unpaid salaries, and payments to oil marketing companies and private and public airport operators, and the Rs.650 crore will be used to meet these obligations, at least partially.
The banks are unlikely to allow this to happen. They want around Rs.800 crore on the table for themselves—half of which is technically called an “irregular amount”, or the dues not paid. This means Mallya would need to bring in at least Rs.1,450 crore to restart operations (that is if Rs.650 crore is enough to take care of other obligations at this point).
If indeed he does that, technically the banks will have scope to restructure the account once again—this is within the realm of the possible—through the so-called corporate debt restructuring (CDR) route. If Mallya does not bring in the money for the lenders, he won’t be able to restart the airline because the aviation regulator, DGCA, will seek a no-objection note from banks and that might not be forthcoming.
The banks can afford to be aggressive as they have nothing to lose. Technically, the Kingfisher debt account turned bad in 2009 even before the first restructuring happened. This is because when a restructured loan turns bad, RBI norms mandate that the lenders backdate it to the time before the restructuring exercise was taken up. Most banks have already set aside money to cover the bad loan, and every rupee recovered from Kingfisher will add to their profits.
SBI, the leader of the consortium, has the maximum exposure at Rs.1,600 crore, followed by PNB (Rs.800 crore), IDBI Bank (Rs.800 crore), Bank of India (Rs.650 crore), Bank of Baroda (Rs.550 crore), United Bank of India (Rs.430 crore), Central Bank of India (Rs.410 crore), Uco Bank (Rs.320 crore), Corporation Bank (Rs.310 crore), State Bank of Mysore, an SBI associate bank (Rs.150 crore), Indian Overseas Bank (Rs.140 crore), Federal Bank Ltd (Rs.90 crore), Punjab and Sind Bank (Rs.60 crore) and Axis Bank Ltd (Rs.50 crore). Overall, their exposure is Rs.6,360 crore, and once the unapplied interest is added, it becomes Rs.7,000 crore.
There are other lenders outside the consortium. They are Srei Infrastructure Finance Ltd (Rs.430 crore), Jammu and Kashmir Bank Ltd (Rs.80 crore) and Oriental Bank of Commerce (Rs.50 crore).
A debt fund operated by Kolkata-based Srei Infrastructure Finance bought ICICI Bank Ltd’s exposure to the airline in July 2012. The non-banking financial company and Jammu and Kashmir Bank has shares of United Spirits and McDowell Holdings Ltd as collateral. The current market value of these shares is about Rs.350 crore—more than their exposure. The consortium has an arrangement with these two entities to get hold of the additional shares and sell them to recover their dues.
Recalling the loan
At least one lender claims to have sent a recall notice to the company some time back, but claims it could not follow up because of pressure from a certain quarter. A senior executive of the bank said he received a call from a bureaucrat from Delhi asking him to follow the leader of the consortium and not to do anything outside that.
But things have changed in the Capital as well, and it now looks like there will not be any pressure from any quarter and banks can chart out their course.
What can they do?
They can move for liquidation of Kingfisher. And for this, they do not need to take legal recourse. Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, secured creditors can move a debt recovery tribunal to recover their money.
A sale of the Mumbai and Goa properties, two helicopters, other fixed assets and shares of UB Group companies can generate around Rs.1,000 crore, roughly 15% of the money that Mallya owes banks.
By virtue of holding the Kingfisher brand as collateral, the banks can prevent United Breweries from using it for its beer, which is sold in 52 markets and accounts for more than one-third of the Indian beer market. And if indeed the banks become aggressive—as they are planning to be—Mallya will have to stop printing the Kingfisher calendar, too, a prestigious project since 2003 in which ace photographer Atul Kasbekar shoots models and film actors on the beaches of Mauritius, the Maldives and the French Riviera.
The corporate guarantee of United Breweries Holdings will also come in handy.
Finally, the banks can play havoc with Mallya’s personal guarantee by seizing all his assets. If Mallya transfers his personal assets to others in his family for fear of losing them to the banks, the banks can move criminal proceedings against him.
As if these are not enough, if banks choose to declare Mallya as a “wilful defaulter”, none of his group companies will be able to access bank funding.
All this is in theory, and I am not convinced the banks will be able to stick to their guns, but at this point, one thing is certain—they are fast losing their patience. With no pressure from other quarters to throw another lifeline to the airline, they are expected to firm up a plan of action by the end of January and start executing it before the fiscal year ends in March.
Their position will change if Mallya is able to offer money to them in addition to generating funds that he needs to make the airline operational in a modest way.
If he fails, banks can remove him from the cockpit and hijack his entire empire. They are not as vulnerable as they seem to be.
Tamal Bandyopadhyay keeps a close eye on everything banking from his perch as Mint’s deputy managing editor in Mumbai. He is also the author of A Bank for the Buck, a book on HDFC Bank. Comments are welcome at firstname.lastname@example.org
P.R. Sanjai in Mumbai contributed to this column.