Move will reduce Goyal’s stake, also remove open offer hurdle for Etihad
The proposal also contains a plan to give lenders the right to nominate one or more members on the airline’s board
Jet Airways (India) Ltd will seek approval from its shareholders to convert a portion of its debt into equity, a move that is expected to bolster the cash-strapped airline while paring the stakes of founder and chairman Naresh Goyal as well as Etihad Airways PJSC.
In an extraordinary general meeting (EGM) on 21 February, shareholders would vote on a proposal to raise its authorized share capital from ₹200 crore to ₹2,200 crore through a special resolution, Jet Airways said in a regulatory filing on Monday.
The move will allow the debt-laden airline to issue fresh shares to lenders in a much-needed financial lifeline. It is, however, expected to result in a hefty drop in the holdings of Goyal and Etihad, with stakes of 51% and 24%, respectively, in Jet Airways at present.
Goyal is expected to bring in fresh investments by subscribing to the new shares of Jet Airways. Abu Dhabi-based Etihad will also be able to make fresh investments without triggering a mandatory open offer.
Jet Airways said the EGM would discuss whether to approve an increase in the authorized share capital of the company from ₹200 crore, comprising 180 million equity shares and 20 million preference shares, to ₹2,200 crore, comprising 680 million shares and 1.52 billion preference shares.
Capital markets regulator Securities and Exchange Board of India had in March 2015 eased regulations for banks to convert debt of defaulting publicly traded borrowers into equity, clearing the way for lenders that are struggling with a surge in bad loan provisions to wrest control of the defaulters, and in some cases allow distressed firms to boost their cash flows by lowering interest costs.
The proposal from Jet Airways also contains a plan to give lenders the right to nominate one or more members on the airline’s board, post conversion of debt into equity.
Jet Airways has been struggling with cash flows for the past six months because of rising fuel costs. The cash crunch forced the airline to delay salaries to pilots and interest payments on its debt. The airline defaulted on payments to a consortium of lenders led by the State Bank of India (SBI) on 31 December 2018.
The financial troubles also forced the airline to halt deliveries of six Boeing Co. 737 Max planes that were due by March.
Jet Airways needs to raise at least $250-300 million immediately to clear dues to lenders and vendors, according to analysts. The airline would need to raise another $450-500 million by the end of 2020 when some of its overseas debt mature, the analysts said.
Etihad’s chief executive Tony Douglas has informed the SBI-led consortium of domestic lenders to Jet Airways that it will not exceed its offer of ₹150 per share of Jet Airways for making any fresh investment, according to reports. The airline has also demanded a complete exit of Goyal and his family from any management or even an advisory role in Jet Airways.
Following this, Goyal made a financial offer to SBI to retain control of the ailing airline, even as its single-largest public shareholder. Goyal has told SBI that he was ready to invest up to ₹700 crore and pledge all his shares, provided he retained at least a 25% stake.
“Naresh Goyal’s stake in Jet Airways could fall to 25% or lower, from existing 51%, after lenders convert debt into equity," said a person with direct knowledge of the matter, requesting anonymity. “Etihad, which is waiting to infuse capital into the Indian airline, provided their conditions are met, could restart talks about fund infusion once the debt to equity conversion is completed."
“As it is, Tata Sons is still interested to invest in Jet Airways, provided Naresh Goyal cedes control in the airline. However, Etihad is in a position to invest in Jet Airways without triggering an open offer as the lenders debt to equity conversion will also bring down Etihad’s stake in the airline," the person said, adding that Etihad might infuse capital and refinance debt without triggering an open offer by not exceeding the shareholding of 25%.
Jet Airways and Tata Sons, which controls the diversified Tata group, did not respond to queries.
“Etihad does not comment on rumour or speculation," a spokesperson said in response to emailed queries.
Shares of Jet Airways fell 3.06% to ₹245.40 on BSE, underperforming a 1.02% drop in the benchmark Sensex.