Even before Jet Airways first defaulted on the payment of interest and principal installment due to its lenders on December 31 last year, the State Bank of India-led consortium had begun working on finding a resolution for the airline, which had started showing signs of stress in November.
First, banks tried initiating talks with its partner Etihad Airways to infuse funds, then tried to rope in National Infrastructure Investment Fund through a bank-led resolution plan, later decided to invite expressions of interest for an outright sale of Jet Airways, and even agreed to restructure debt under the resolution plan if a new buyer was willing to bring in capital.
Through all this, one thing was clear. Taking the insolvency route for reviving the airline would be the last option, and every effort was taken to avoid Jet Airways ending up in the bankruptcy court.
Bankers insisted that unlike manufacturing companies that are asset heavy, taking a services company to the bankruptcy court would not leave much scope for recovery. For a services company like Jet Airways, its assets are its aircraft, slots, flying rights, employees and its brand. Jet Airways has already lost most of these, some temporarily, and some permanently. Therefore, the NCLT route was not seen as a viable option by its lenders.
Six months later, the same consortium of lenders has filed an insolvency petition against Jet Airways at the Mumbai bench of NCLT. SBI released a statement on behalf of the lenders late on Tuesday, saying “a meeting of lenders was held today to consider the way forward in respect of Jet Airways. After due deliberations, lenders have decided to seek resolution under IBC since only a conditional bid was received and requirement of the investor for Sebi exemptions and resolution of all creditors is possible under IBC. Lenders led by SBI have been taking efforts to find a resolution for Jet Airways outside IBC but in view of the above, lenders have decided to seek a resolution within the IBC process”.
What has changed?
Several factors have influenced this decision. The biggest one perhaps is the comfort of a court-driven process for the lenders involved, which eliminates the threat of witch-hunting by investigative agencies in future. The memory of Kingfisher Airlines is still too fresh in the bankers’ memory, where infusing capital in a dying airline, and agreeing to restructure bad debt had landed bank officials in jail. The only bidder that came forward for Jet -- its partner Etihad Airways -- had sought a large haircut by banks. Banks were uncomfortable agreeing to their demands, and wary of taking such large haircuts outside a court-driven process, primarily to avoid allegations of wrongdoing by the likes of CBI and CVC in future.
Additionally, the concessions that Etihad Airways had sought from lenders for a potential investment, including pricing discount and exemption from making an open offer, were simply not permissible under Sebi norms. With Etihad Airways unwilling to modify its terms, banks found it impossible to accept their offer.
Even if Etihad’s conditions were somehow met, by seeking exemptions from Sebi and RBI, and banks agreeing to write off most of the debt, it would still have needed an Indian partner to revive the airline, another challenging task, given that in the previous bidding round, no aviation company showed an interest, and even the private equity players that did submit EOIs never came back with a binding bid. Hinduja Group, which had been exploring opportunities along with Abu-Dhabi based Mubadala Group, to potentially invest in Jet Airways, also never came back with a concrete plan, beyond offering a fraction of the Rs 6,000 crore of capital required to restart operations.
Banks have lent Jet around Rs 8,500 crore and the liabilities, including payments to vendors, are more than Rs 25,000 crore.
Based on an assessment, the airline’s most valuable assets are its planes. The company, which had a total fleet size of around 119 planes until a few months ago, owned 16 planes including 10 Boeing 777. The wide-bodied Boeing 777 planes, along with slots and international traffic rights, are a key asset for the airline.
While there are takers for the un-registered B737s of Jet Airways in the domestic market like SpiceJet and Vistara, there are still no interested parties for the B777s. National carrier Air India had shown interest in getting some of these 777s by writing a letter to SBI chairman Rajnish Kumar, but they soon dropped that plan after their engineering team did not give a go ahead post inspection.
Dhiraj Mathur, Partner at PWC, told CNBC-TV18: “I mean they (banks) promised to pump in Rs 1,500 crore in the airline when it was up and running. If they had done that then, they would have gotten an investor. The airline would have continued running. And then if they couldn't find someone, they could've probably taken the NCLT route but they have decided to do it now, having failed to find an investor through negotiations. I don't know how they are going to find one through NCLT but let's see, they might have to take a larger haircut.”
The Jet Airways account is already classified as a non-performing asset with a handful of banks, including its largest lender SBI, and remains a Special Mention Account (SMA) with the others. Under Reserve Bank of India’s revised June 7 circular on resolution of bad loans, banks are given a 30-day review period before they have to work out a resolution plan for a defaulter within 180 days, failing which they are penalised with large provisions. The clock has been ticking, and with no alternate offers on the table, banks on Tuesday decided to refer Jet Airways to NCLT under the Insolvency and Bankruptcy Code.
Suharsh Sinha, Partner at AZB and Partners, added, “It doesn't come as a surprise that finally the lenders have decided to take the matter into bankruptcy. I think two or three issues would have precipitated this filing. First of all, in Amsterdam, a Dutch court has also initiated bankruptcy proceedings against Jet Airways. Secondly there were some aircraft at the Schiphol airport that have also been repossessed by lessors. Thirdly, some operational creditors have also initiated bankruptcy against Jet. The last trigger has been the RBI's new circular which says that if a company defaults as on the reference date, there needs to be an inter-creditor agreement and there has to be a resolution within six months. Interestingly, in the first one month in the review period of that circular you were not prohibited from initiating bankruptcy. So the combination of these four or five things have triggered the filing of the petition bankruptcy.”
Experts CNBC-TV18 spoke to were of the view that had the banks taken the company to NCLT earlier, when it was still operational, perhaps the chances of a revival would be higher. Sinha explained, “In my opinion, if this had probably happened earlier, then we could have preserved a lot more value of Jet, because if the bankruptcy matter gets admitted, then there is a moratorium or automatic stay, during which the property of a company, even as a lease-hold right, cannot be repossessed from the lessors because moratorium under IBC would continue over them. Many aircraft repossessed by the lessors could have been saved and the airline would still be flying.”
What happens next?
Two operational creditors, Shaman Wheels with about Rs 6.8 crore of dues and Gaggar Enterprises with Rs 53 lakh of dues against the airline, have already moved a petition in Mumbai NCLT, seeking to initiate insolvency proceedings. The financial creditors led by SBI, which has so far restrained from taking this route, will now join them in this petition. In all likelihood, this will mean NCLT will admit this case, and begin proceedings under IBC.
The first step would be the appointment of a resolution professional to run the operations of the company until a new buyer is found. Banking officials who did not wish to be quoted said that SBI has proposed Ashish Chhawchharia of Grant Thornton as the Interim Resolution Professional in its application. Under NCLT, banks will have 180 days, extendible up to 270 days, to find a resolution plan for the company, failing which it will head into liquidation.
Some banks are hopeful that Jet will find a buyer under NCLT as incentives like exemptions from making an open offer would be available, and the actual liabilities of the airline will be made public -- which should comfort a potential investor. CNBC-TV18 had reported earlier that the Tata Group may potentially look at acquiring Jet Airways if it were to be sold under an NCLT–driven process.
But others are of the view that liquidation is a possibility, given that the bid process did not invite any interest in the past. These bankers are of the opinion that the airline has lost too much time and too many of its assets. Some bankers said on the condition of anonymity that the airline could have fetched a better value if it had been a going concern, but there are still bilateral rights, licence to operate an airline and airport slots that remain to potentially lure a buyer.
Abizer Diwanji, Partner and National Leader-Financial Services at Ernst & Young India said: “Most of the enterprise value has left. What can an IBC do for you? What can an IBC, CIRP period do for you? Very limited frankly, unless of course the existing bidders want to come and bid as part of the IBC process which would give you at least one of concessions, which is the open offer extension… because the equity value would slump of this. So I think that is the only advantage….There is no asset or franchise left. So, a quick liquidation is what is most anticipated.”