Crisis-hit Jet Airways (India) Ltd has pledged its fixed deposits (FDs) with various banks, totalling ₹1,500 crore, to borrow ₹225 crore from the State Bank of India (SBI), loan documents reviewed by Mint show.
The airline has the option to borrow more from SBI with the same FDs as security.
The airline decided to borrow against the FDs rather than redeem them because the deposits continue to earn a higher interest than what Jet has to pay to SBI, a person aware of the loan transaction said on condition of anonymity.
Since 8 February, lessors have grounded at least 23 planes because of non-payment of rent. In the past few months, Jet has struggled to pay dues to banks, vendors, lessors and employees, and has seen a series of credit ratings cuts. It has recorded losses of more than ₹1,000 crore in each of the previous three quarters, and is expected to post a loss in the March quarter too.
“Banks were reluctant to sanction a term loan to Jet Airways without gaining exclusive rights on the airline’s interest-yielding cash deposits or appreciating assets or equity share pledges," the person cited above said. “Finally, SBI agreed to disburse a term loan after Jet Airways allowed the bank to pledge all its FDs with exclusive rights. Jet Airways may raise more capital from banks and stakeholders as part of the overall resolution plan."
A negative net worth and several credit rating cuts have forced what was once India’s premier private airline to borrow against FDs, usually the last resort for companies facing liquidation risks or having no creditworthy assets.
Lenders typically demand secured assets with assured returns only when they suspect the borrower’s ability to repay the loan or the company has no other income-yielding asset or has all other assets pledged for other loans.
According to the latest loan documents, Jet Airways has given “first and exclusive" rights on all its FDs to SBI for securing the loan.
SBI has given Jet Airways the term loan at an interest rate of 6.25%, to be repaid by 29 April 2019. According to the loan documents, Jet Airways will have to pay a total of ₹250 crore to SBI by the time the loan is repaid. The loan was sanctioned after the agreement was signed on 31 January.
Jet had a total debt of ₹9,610.16 crore as of 31 December. The carrier had a negative net worth of ₹10,370.24 crore on that date.
Ratings company Icra Ltd has downgraded Jet Airways’ credit ratings in September, October, December 2018 and January 2019.
Emails sent to Jet Airways and SBI remained unanswered.
“The money will be used by the airline primarily to fund its core businesses, which include cost of flying, parking and paying salaries to the staff, and avoid further grounding of aircraft," said the person cited earlier.
According to the loan agreement, SBI has the right to take all benefits of the FDs and their accrued interest incomes, if the airline fails to repay the loan. SBI, the biggest lender to Jet Airways, said on 17 January that the airline’s lenders were considering a plan to resolve its debt issues. Mid-February, Jet Airways, after several attempts at finding help to rescue the carrier, approved a bailout plan aimed at making its lenders the largest shareholders and fixing a near ₹8,500 crore funding gap.
On 23 February, its board approved the conversion of some of the debt into equity, resulting in founder and chairman Naresh Goyal’s holding falling from 51% to below 20%.
On Friday, Goyal agreed to step down from the airline’s board and surrender his directorial powers.
The airline’s defaults and rising expenses on account of higher jet fuel costs and increased competition in the private civil aviation space have forced it to scrap on-board freebies it used to offer to its passengers earlier.