Jet Doubles Repayment as Default Halts Kingfisher: India Credit

Jet Doubles Repayment as Default Halts Kingfisher
Jet Airways must divest at least a 5 percent stake by June to meet a rule capping founders’ holdings in companies at 75 percent. Photographer: Adeel Halim/Bloomberg

Jet Airways (India) Ltd. plans to more than double loan repayments to help attract investors after a default grounded rival Kingfisher Airlines Ltd.

India’s biggest listed carrier will pay $600 million of debt in the year ending March 31 and seek rupee loans with interest rates as low as 10 percent, Chief Financial Officer Ravishankar Gopalakrishnan said in a Nov. 5 conference call. The company, which pays as much as 14 percent on some debt, is looking for ways to reduce borrowing costs as the nation’s central bank keeps its benchmark repurchase rate at 8 percent, the highest among major Asian economies, to curb inflation.

“In terms of raising additional equity, being able to reduce your leverage makes it more attractive for potential investors,” Binit Somaia, a Sydney-based director at industry consultant CAPA Centre for Aviation, said Nov. 8 by telephone.

Jet Airways must divest at least a 5 percent stake by June to meet a rule capping founders’ holdings in companies at 75 percent. Prime Minister Manmohan Singh in September allowed as much as 49 percent foreign investment in aviation. The carrier is selling and leasing back planes to free up cash even as CAPA predicts rising fuel and airport costs will increase the record combined debt of local carriers including state-run Air India Ltd. by 18 percent to $20 billion in a year.

Borrowing Costs

The weighted average cost of the Mumbai-based company’s debt was 11.2 percent in the three months ended Sept. 30, compared with 11.1 percent for Tam SA, Brazil’s largest airline, in the quarter ended March 31, data compiled by Bloomberg show. Jet Airways had 120 billion rupees ($2.2 billion) of liabilities as of September, Chief Commercial Officer Sudheer Raghavan said in the Nov. 5 conference call.

Indian carriers pay as much as 18 percent interest on short-term debt, and as much as 14 percent on long-term borrowings, according to a document prepared in June by the Ministry of Civil Aviation. Airlines have sought government help to access long term funds at a fixed cost, it said.

The benchmark five-year bond yield for Indian banks rated AAA by Crisil Ltd., the Indian unit of Standard & Poor’s, has declined 74 basis points this year to 8.78 percent, according to data compiled by Bloomberg, after the Reserve Bank of India cut lenders’ cash reserve requirements to 36-year low of 4.25 percent to free up cash for lending. The yield on benchmark 10-year sovereign bonds slid 35 basis points in the same period to 8.22 percent, the data show.

The Reserve Bank of India’s benchmark rate is higher than 6 percent in China, 2.75 percent in South Korea, 2.75 percent in Thailand and 5.75 percent in Indonesia.

Kingfisher Default

Kingfisher, controlled by liquor tycoon Vijay Mallya and named after his best-selling beer, had its operational permit suspended on Oct. 20 after the carrier halted flights following a strike by its employees over unpaid salaries. The airline, with debt totaling 86 billion rupees, defaulted on loans and interest payments on several occasions in the year ended March 31, its auditor said in the company’s annual report.

Bangalore-based Kingfisher has pledged assets including its brand, aircraft and office furniture against loans. Chairman Mallya, who has given personal guarantees worth 59 billion rupees for the carrier’s loans, told reporters on Sept. 26 the carrier is in talks with airline investors for a possible stake sale after the government eased ownership rules.

The carrier’s founders have contributed 11.5 billion rupees to the company since April 1, the chairman told shareholders at the company’s annual meeting Sept. 26. Mallya and his holding company are selling a 19.3 percent stake in liquor business United Spirits Ltd. to Diageo Plc as he seeks cash, the companies said in a statement on Nov. 9.

Air India

Air India, the nation’s most indebted carrier, plans to sell five Boeing Co. 777 aircraft to help pare loans totaling 430 billion rupees. In April, the state-owned airline won government bailouts worth 300 billion rupees, including cash injections, through 2020.

Mumbai-based Jet Airways, which has planes worth $2 billion available for sale and leaseback transactions, will be able to unlock $500 million after discounting aircraft loans of about $1.5 billion, K.G. Vishwanath, vice president of commercial strategy, said in a Nov. 5 conference call. The carrier has resolved “certain instances” of late payment, he said Aug. 6, without elaborating.

The company’s overall debt remains high even after it repaid some loans, Niraj Mansingka and Kiran Tulasi, analysts at Edelweiss Securities Ltd., wrote in a Nov. 5 research note. Jet Airways repaid 15 billion rupees of loans in the financial year ended March 31, according to Vishwanath.

Prospects ‘Enhanced’

“If the balance sheet trims in terms of debt, the prospect of raising equity capital is enhanced,” said Mahantesh Sabarad, an analyst with Fortune Equity Brokers India Ltd. in Mumbai, said in a Nov. 8 telephone interview. “High indebtedness is one of the reasons why they’ve been unsuccessful in raising equity capital in the past.”

The government in March permitted domestic airlines to tap overseas borrowings. The central bank on April 24 issued guidelines allowing each carrier to borrow a maximum of $300 million for working capital or to refinance rupee debt. In September, the government ended a ban on overseas holdings in airlines as part of a wider drive to attract investment and boost growth from the slowest pace in a decade.

‘Fight for Survival’

The measures helped the rupee gain 1.2 percent since Sept. 13, the day before the government eased ownership rules in airlines and retail. The currency traded at 54.75 per dollar as of 11:07 a.m. in Mumbai, compared with 54.76 on Nov. 9, data compiled by Bloomberg show.

The nation’s bond risk fell. Credit-default swaps on State Bank of India, which some investors consider a proxy for the sovereign, fell 152 basis points, or 1.52 percentage point, in 2012 to 243 in New York, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to debt agreements.

“It’s a fight for survival, and that’s what airlines are trying to do by shedding debt,” Harsh Vardhan, chairman of industry adviser Starair Consulting, said in a Nov. 9 telephone interview from New Delhi. “Only then can they look forward to future growth.”

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