Jet’s rights issue delay could hurt balance sheet

Jet’s rights issue delay could hurt balance sheet

New Delhi: Jet Airways (India) Ltd’s decision to delay a much-needed $400 million (Rs1,640 crore) rights issue for a few months could lead to a cash crunch at the airline starting January as the carrier starts to take deliveries of several expensive, wide-bodied aircraft at a rate of almost one a month, say analysts who track the aviation firm’s stock.

Jet Airways’ decision, which surprised some investors, was pegged to the ongoing turmoil in the global stock and credit markets, and did not affect its stock price, which has been climbing steadily in the past months, finishing on Thursday at a year’s high of Rs845.60, up 56% from its lowest point earlier this year in March.

The Mumbai firm declined comment for this story; a spokesperson referred questions to executive director Saroj Datta, who did not respond to an email. But at a Tuesday press conference, Jet Airways chairman and promoter Naresh Goyal said: “We are all right even without the money."

The $400 million that the rights issue is expected to raise constitutes the 15% cash payment of $2.5 billion for aircraft purchases that is to form the bulwark of the airline’s international operations. The remaining 85% is financed as a loan from the US Exim Bank, which provides loans to most firms purchasing aircraft from US aircraft maker Boeing Co.

As each plane shows up, the airline must make good on-delivery payment promises, at a time that its cash reserves are being sapped by investments into loss-making JetLite (India) Ltd, the subsidiary it created by purchasing Sahara Airlines Ltd earlier this year.

“They really are not in the best of positions right now," said a Mumbai-based analyst for a brokerage house that owns a small stake in Jet Airways. “To some extent, they never formally announced a date, and I think they were waiting to get a comfort level with a date."

The analyst, who asked not to be named because of company policy, said he felt that by the beginning of next year, Jet Airways’ requirement for the $400 million will be severe enough for it to have to hold the rights issue, regardless of market conditions.

There is no way to predict how the credit markets will look like in December or January, and if the current weakness continues, Jet Airways might have to make different arrangements, said Damien Horth, an analyst at UBS Ltd.

“They are taking a risk that they don’t get worse," he said. “They can use bank debt to a degree but at some point, they have to get their leverage ratios in order so that they meet their lenders’ requirement."

Both Horth and the other analyst feel that there was little doubt that Jet Airways, with its robust balance sheet and brand name, would be able to make alternative arrangements if needed, even if they proved to be more expensive.

“It is ultimately a decision on trading off the costs of financing versus taking the risks of going to the markets," said Horth.

Goyal owns about 79.8% of Jet Airways, through Isle of Man based-Tail Winds Ltd, and has told analysts in the past that he intends to exercise his rights options fully so as to not dilute any of his equity. That would require him to invest approximately $320 million when the rights issue is eventually floated.

It is not clear where he would get that amount of cash from—his earnings from dividends at Jet Airways, or from sale of equity during the initial public offer in 2005, did not exceed Rs500 crore, according to the analyst.

Goyal declined to discuss that possible investment, saying instead that “as far as Jet Airways is concerned, I fully intend to maintain a majority share".

He has overseen the launch of multiple international flights in the past two years, including the creation of a hub in Brussels, and the launch earlier this month of flights between Delhi and Mumbai to Newark, New Jersey, an airport about half an hour from New York City. But those operations are currently unprofitable, as are most of Jet Airways’ other international flights, including those between various cities in India to London, Singapore, Kuala Lumpur and Colombo.

The costs of that expansion have periodically pushed earnings into the red at Jet Airways, still the most consistent financial performer among India’s publicly listed airlines.

But Goyal said he expected the next quarter, which will end 31 December, to be profitable at the operations level.