Qrius: Here’s how majority lender SBI’s bailout plan will clear Jet debt

2 April 2019: The State Bank of India (SBI), the majority lender in Jet Airways, has proposed a new bailout plan to rescue the airline from debt and insolvency. It has created a payment structure that will give Jet Rs 9,535 crore. The Indian airline was close to insolvency after it defaulted on loan payments and staff salaries.

Jet’s co-founders, Naresh and Anita Goyal, stepped down from their positions on the board earlier last week.

CEO of Etihad Airways Tony Douglas also previously met with SBI to chalk out Etihad’s exit from Jet. After a few rough years, Etihad has also been forced to restructure its finances and ensure that it does not engage in risky deals until the company’s books stabilise.

Two of Etihad’s previous investments, namely Air Berlin and Alitalia, have filed for bankruptcy after being unable to face stiff competition from cheaper airlines.

Etihad itself is vying for customers with Emirates Airlines and Qatar Airways and trying to avoid anymore losses.

Details on SBI’s bailout

SBI’s bailout plan will ensure Jet gets an equity infusion of Rs 3,800 crore from two unnamed investors, Rs 850 crore from public sector banks, and Rs 484 crore from public shareholders. This brings Jet’s cash infusion up to Rs 5,134 crore.

The two unidentified investors will give Jet Rs 1,700 crore and Rs 2,000 crore. Under this deal, Jet will also get debt write-offs.

Domestic lenders will also write off debt worth Rs 2,600, and Mashreq Bank in Dubai and HSBC in the UK will shave off Rs 1,700 crore from the airline’s debt, as well. 

Etihad Airways, another significant shareholder in the company, will exit as well.

Naresh Goyal and Etihad will transfer their 51% and 24% stakes in the airline to an independent trust whose managers will be appointed by SBI and other lenders, reported Livemint.

The lenders will now get majority stake in the company of 50.1%; also, the independent committee comprised of Goyal and Etihad’s equity will control 37.4%. Public shareholders will get the rest.

Although Goyal has stepped down, CEO Vinay Dube and CFO Amit Agarwal will continue on in their roles. SBI Chairman A K Purwar will now replace Goyal as chairman of Jet board.

Jet’s shareholders are yet to approve this new resolution plan, but lenders are expecting a jump in the airline’s stock price that will add another Rs 2,636 crore to the airline by 2022.

Jet’s financial troubles come to a close

Like Air India and Kingfisher, Jet has also had its fair share of financial turbulence, regardless of being the largest airline for the last 25 years.

Critics of the deal have said the government is using a “back door” to bail out a private company without due diligence or independent financial valuations.

“Private players will walk away happily, while the government of India and PSU banks will be now running a bankrupt private airline,” said Randeep Surjewala, Congress spokesperson.

The Modi administration has also received pushback for infusing Air India with enough cash for basic survival. Experts say this “drip feeding” disrupts the natural price competition in the aviation industry because other airlines cannot charger higher ticket prices if Air India keeps surviving and offering cheap tickets.

SBI Managing Director Arijit Basu said board of directors, not lenders, will run Jet. However, the fact that public lenders helped Jet escape insolvency and spared the aviation industry more instability may be framed as a personal win for ‘Modinomics’. 

Supporters of the deal say SBI has been fighting to ensure Jet is rescued from debt because, as it is the country’s largest airline, hundreds of pilots and staff risked losing their jobs. Business Today reports that close to 16,000 people were facing unemployment if Jet did not recover.

If Jet did not find its wings soon, the Indian aviation industry was headed for financial turmoil. Regardless, Jet’s new resolution plan is good news for the common Indian, who was previously caught in the crossfire between Goyal, Etihad, and the lenders. 

As reported on qrius.com



Categories: General News, India Bankruptcy

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