Is Jet Airways inching towards bankruptcy court for a resolution?

The floundering Jet Airways is up for grabs as twenty-six lenders led by the State Bank of India (SBI) have invited expressions of interest for selling stakes in the airline.

There is every likelihood of new bidders or investors beating down the price or the valuation of the troubled airline, which has grounded most of its planes. At last count, it had only 20 planes in its operational fleet as compared to 120 in good times. It has accumulated huge losses in its books. There is a large debt to service as redemption is coming up. Crediting salaries for a workforce of 22,000 people is also a challenge.  

All bidders know that banks are desperate to recover their money from the airline. While the market price of Jet Airways is over Rs 250, purely driven by the speculators, the equity partner Etihad was actually willing to sell its stake at a much lower price of Rs 150 per share to SBI earlier. Investment banking sources say the new bidders or investors are going to bargain hard. But will the banks be willing to sell Jet cheap?

The time is running out as Jet has various payment obligations from salaries to lease payments. The banks though promised additional fund of Rs 1,500 crore, the full money is still to come. There is every possibility that the airline will go to bankruptcy court, where bidders or investors will be in a better place to get the best valuation as banks could be forced to take a haircut. The current debt of Rs 8,000 crore along with an additional debt of Rs 1,500 crore will make it difficult for the airline to service the debt in future. "Is the airline viable with huge debt in its book? The new investor would look into viability and the payback period," say sources.

While the recent Supreme Court order has shot down the RBI's circular, directing banks to take defaulters (even for a day) to bankruptcy court if no resolution is found within six months, the Jet Airways case was triggered under the February 12 circular. Promoter Naresh Goyal, who is set to lose his majority stake in the airline, has the option to challenge the resolution and subsequent bankruptcy proceedings under the February 12 circular, but the RBI still has power to redirect the case under bankruptcy code. The Supreme Court mandates the RBI to exercise its power under Section 35 AA in respect of specific defaults by specific debtors. People in the know say Goyal won't get a favourable ruling if he challenges the resolution proceedings post the Supreme Court ruling. Goyal doesn't have money to pump in nor is Etihad willing to bring in more money given the challenging market scenario.

Meanwhile, the equity capital is expanding with 113 million new shares to be issued to banks at Rs 1. The airline is already finding it difficult to service the current equity. The equity expansion is not a good news for new bidders. Higher the equity, more difficult it is to service it. The new investors would look at the enhanced equity capital into consideration while putting the bid amount. For example, the current equity capital of Jet Airways is at Rs 113 crore, which is expected to expand to over Rs 200 crore after new shares are issued to banks. Indigo has a very high equity of Rs 384 crore and Spicejet has a equity capital of Rs 599 crore. In the past, Jet Airways had managed its operation very well with a very small equity. In fact, the low equity capital also reflected in its valuation as the share price was close to Rs 1,000 per share in 2005.

Jet Airways incurred a huge of Rs 3,667 crore in financial year (FY) 2013/14 and Rs 1,813 crore in FY2014/15. After two good years, the airline again plunged into losses. In 2017/18, it clocked a loss of Rs 767 crore. The losses for the nine months in financial year 2018-19 expanded to Rs 2,540 crore.

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