Mallya to Use Diageo Deal Proceeds to Cut Kingfisher Air Debt

Vijay Mallya, founder of Kingfisher Airlines Ltd., will use proceeds from the sale of a stake in United Spirits Ltd. to pare the Indian carrier’s $1.6 billion debt, reversing his earlier stand, as lenders mount pressure.

Mallya is in discussions with banks “on ways to bring down their exposure, interalia, from the proceeds of the Diageo transaction,” Prakash Mirpuri, a spokesman for Mallya’s UB Group, said in an e-mailed response. The group has not got any “formal communication” from the banks, he said.

Diageo Plc in November agreed to pay 111.7 billion rupees to acquire a 53.4 percent stake in India’s biggest whiskey maker, which is controlled by Mallya. Pratip Chaudhuri, chairman of State Bank of India, one of Kingfisher’s creditors, said yesterday that lenders can sell shares of United Spirits and other group companies held as collateral to recover part of the loans.

“Bankers were pressurizing the UB group as Mallya had said that the money from the deal with Diageo will not be used to repay loans of Kingfisher,” Vishal Narnolia, a Mumbai-based analyst at SMC Global Securities said by phone. “UB group is being forced to pay the money to save the deal.”

The sale of the shares of companies controlled by Mallya held as collateral can help recover as much as 10 billion rupees ($185 million), Chaudhuri said in Mumbai yesterday.

Loan Recovery

Mallya said in November that he will address Kingfisher Airlines’s needs “separately” from the Diageo deal and the proceeds from the stake sale will not be used to pay Kingfisher Airlines dues.

Indian lenders will start the recovery process on the loans to Kingfisher, Shyamal Acharya, deputy managing director of State Bank of India, the nation’s biggest, said in an interview to Bloomberg TV India on Feb. 13.

“The banks explicitly support the transaction with Diageo,” said Mirpuri. “And would work with us in finding an orderly method of disposal of some of the pledged shares to Diageo if appropriate.”

Shares of United Spirits fell 0.2 percent to 1,897.95 rupees in Mumbai today. Kingfisher Airlines and United Breweries Holdings Ltd. dropped 5 percent.

The carrier had 86.3 billion rupees of debt at the end of September, according to data compiled by Bloomberg. The airline, which grounded planes on Oct. 1, posted a loss of 7.55 billion rupees in the quarter ended Dec. 31, widening from 4.4 billion rupees a year earlier.

Diageo in November agreed to buy 17.4 percent of United Spirits at 1,440 rupees per share from companies controlled by Mallya, gain an additional 10 percent holding by subscribing to new shares and then make an open offer for a further 26 percent stake.

Mallya’s United Breweries Holdings controls 27.44 percent of United Spirits and 32.39 percent of the carrier, according to data compiled by Bloomberg. United Breweries Holdings has given guarantees of 77.23 billion rupees as of March 31 on behalf of its associates, the annual report said.