Banks now get to co-pilot Kingfisher

Banks now get to co-pilot Kingfisher

Mumbai/New Delhi: The State Bank of India-led consortium of lenders that bailed out cash-strapped Kingfisher Airlines Ltd will get a seat on the carrier’s board and will now be able to influence future management decisions.

The consortium now owns a little less than one-fourth of the airline’s equity following a debt-equity swap on 6 April.

“One seat which was vacant after Captain Gopinath left will be taken over by the banks. It’s for the banks to nominate a person after which we’ll go through the entire process of home ministry clearances as is required in an airline," said Ravi Nedungadi, chief financial officer of Kingfisher’s parent UB Group.

B.A. Prabhakar, executive director, Bank of India, one of the consortium members, said typically the lead bank represents the consortium on the board.

Air Deccan founder G.R. Gopinath, who was part of the board of Kingfisher after it acquired his carrier in 2008, resigned in 2010.

This will be the second biggest change at the Vijay Mallya-controlled airline after the appointment of chief executive officer Sanjay Aggarwal last year.

Kingfisher, with debt of over 6,000 crore, has been hoping to raise $250-300 million ( 1,113-1,335 crore) through an issue of global depository receipts (GD on the Euro MTF Market of the Luxembourg Stock Exchange, but has not been able to so since the stock price has slumped.

On 6 April, the consortium of 13 banks converted a 750 crore loan into 23.37% equity in Kingfisher, valuing the company’s shares at a 61.60% premium over the price prevailing that day.

Consequently, the promoter holding has fallen from 66% to 58%, and if the airline goes in for a GDR issue at the current share price, it will fall further to the “mid-40s", said Nedungadi.

The airline is looking for a “window of opportunity" for the GDR, but no dates have been firmed up yet because of fluctuating oil prices and the crisis in West Asia, he added.

The conversion of shares at a premium has been criticized by some as causing loss to the exchequer since 13 of the 11 banks are government-owned.

Kingfisher stock ended at 45.40, up 1.91%, on Wednesday even as the Sensex gained 2.25%.

“Banks have taken a haircut," said the chief financial officer of an industrial group who tracks the carrier, declining to be named. Banks, he added, should have sought more equity.

Nedungadi denied banks would lose money. “The pricing formula was not determined by the banks or by us. It was floor formula for any kind of issue other than rights issue. The UB Group has also converted an equal amount of 700 crore-plus into equity at the same price," he said. “It’s not as if we have tried to take advantage of the ‘poor’ public sector banks."

Kingfisher could not have raised fresh equity without the debt restructuring, he said.

Since a merger with Deccan, Kingfisher’s losses have increased from 188 crore in 2007-08 to 1,647 in 2009-10. It reported a 671.85 crore loss for the nine months till December.

“The conversion has been done on the Sebi (Securities and Exchange Board of India) pricing formula. Banks have no say in it," Prabhakar said.

Nedungadi said the airline’s performance was improving and that this would mean the banks would get a better price for their shares should they decide to sell them once they are allowed to next year (after a lock-in period).

In an 18 June meeting last year with executives of 13 government banks, the Reserve Bank of India (RBI) had expressed reservations on Kingfisher’s debt restructuring request. It would be “a moral hazard for RBI to give any regulatory forbearance for any specific company", Mint reported on 13 July, citing the minutes of the meeting.

“This short-term perspective for restructuring the debts of a company which had negative net worth for the last two years had now pushed the banks into a situation seeking extensive regulatory forbearance," RBI observed. “It was made clear that any regulatory consideration of banks’ requests regarding restructuring guidelines can only be for the aviation sector—and not for any airline in isolation—in view of the difficulties faced and provided banks came together in a consortium arrangement and took a long-term and holistic view on the restructuring."

Centre for Asia Pacific Aviation’s South Asia CEO Kapil Kaul, too, described the deal as a “life saver" for the airline.

“What you have underestimated is that banks have also given them 1,100 crore of further debt provisions. The last step left is capital raising. They need $250-300 million, which will not be sufficient for the carrier," he said. “I think the promoters will need to infuse more funds into the airline even after the GDR."

Another analyst said it was a tough decision for the banks.

“I’ve no knowledge of the decision-making process followed by the government/RBI to make policy changes that resulted in the debt of Kingfisher being converted into equity," said Rishikesha T. Krishnan, professor at IIM Bangalore, who tracks the industry. “However, what is clear is that banks essentially had a Hobson’s choice—either take a big write-off under the prudential norms for ‘non-performing assets’ or postpone the problem by converting debt into equity and hope for the best."