Asset sale still last option for Kingfisher Airlines' lenders: source

Lenders to Kingfisher Airlines, which probably stand to lose more from DGCA’s suspension of the airline’s license than the company itself, are concerned about the development, but insist that a sale of Kingfisher’s assets to recover their loans remains the last option.

"Recovery is the last option we are looking at, as at best we will be able to recover just about 15 per cent of the total amounts from the pledged assets," an official of a public sector bank, which has an exposure of close to Rs 500 crore to the airline, said.

According to KPMG, lenders are the worst hit since they may have to take a significant write-down of the loans that have gone bad. “Creditors like oil companies, airport companies, service providers and employees may also have to forego their dues,” the analyst firm said in a report.

About 17 banks, led by State Bank of India (SBI) have an exposure of Rs 7,500 crore to the debt-ridden airline. At Rs 1,500 crore SBI has the maximum exposure.

That apart, the lenders together hold around a 23 per cent stake in the airline since March, after the banks converted their Rs. 6,500 crore of recast debt (after a corporate debt restructuring, or CDR, in November 2010) into equity.

Aviation regulator Directorate General of Civil Aviation (DGCA) on Saturday suspended Kingfisher’s licence for failing to come up with a viable financial revival plan. The Vijay Mallya-promoted airline, which has not operated a single flight since October 1, had been asked to explain by today why its licence should not be suspended or cancelled for not providing a "safe, efficient and reliable service". But its response to the show cause notice issued by the regulator was allegedly not satisfactory. The airline had asked for more time and a personal hearing, and gave no details on either a financial plan or an operational plan.

"We are concerned as we have no control on these developments. We were prepared for all these. The last thing we bankers want is a complete shutdown of the airline as we want the airline to resume operations and repay our money," S Vishwanathan, managing director (mid-corporates) of SBI, told PTI.

Kanu Gohain, former director-general of civil aviation, said: “The time is appropriate for DGCA to take the action. There is no question of negotiation now. Once the order is issued, it is on Dr Mallya to plan his next move. Whatever he does, he must bring in a concrete plan with evidence. There is no rule that the DGCA will intervene for the salary of employees. It is a technical regulator and it has to ensure the permit and the conditions of the permit are fulfilled by the permit holder.”

A WAY OUT?

According to Mr Vishwanathan, there are three options for the airline and the banks.

“First, the airline restarts working and then starts repaying us; second, a new investor comes and we finance him or he repays our debt and runs it on his own; and, finally, the airline is completely shut down, in which case we will have to look at recovery measures," he said.

According to the Kapil Kaul, CEO of South Asia at Centre for Asia Pacific Aviation (CAPA), the ball is in the court of the promoters of United Breweries Group to bring in money.

A city-based bank official who did not want to be named said, "We are persuading the airline to bring some fresh equity and resume operations. Towards this we can even look at recasting his existing exposure as a fresh lifeline."

The Vijay Mallya-owned airline and its promoters have most of their shares and assets pledged with banks, including the brand Kingfisher (pledged for a value of Rs. 4,100 crore) and two of its properties -- the Kingfisher Villa in Goa and the Kingfisher House in Mumbai, together valued at around Rs. 200 crore.

However, with the airline running into its roughest weather yet, sources say the properties will fetch just about Rs 150 crore of the Rs 7,500 crore debt as its brand valuation has deteriorated.

Bankers also have the option of invoking guarantees by the UB Group as well as a personal guarantee by Mr Mallya. This could be a major trigger, according to Mr Kaul, who does not expect a major amount of the debt to be recovered. “Bouncing back for the airline is now a rarity,” Mr Kaul said.

The consortium of lenders is now likely to meet this week again, against the backdrop of the licence suspension, to discuss the way forward, sources said. Mr Mallya is likely to be asked to attend the meeting, the sources added.

In a report earlier, CAPA, which estimates Kingfisher's debt at around $2.5 billion (Rs. 13,460 crore), said a fully funded turnaround would cost at least $1 billion (Rs. 5,384 crore) and that Kingfisher had only an outside chance of recovery given its massive debts, crippled fleet and poor employee morale. With about 4,000 staff, Kingfisher’s wage bill works out to approximately Rs. 30 crore a month. Of the total 4,000 employees, 2,000 have received salaries until March. From April, there have been no salary payments. So while the Rs. 60 crore from the escrow account can cover payments for two months, it is unlikely to improve the situation, given that staff has demanded payment of all outstanding salaries.

The airline was forced to declare a lockout and suspend flight operations after its 250 engineers went on strike on September 30. They were later joined by pilots. The employees are protesting against non-payment of salaries and dues, and have said that work will resume only after all dues are paid and assurances are given that salaries will be paid on time. The airline last paid some of its employees salary in March this year; for seven months no one has been paid.

On Friday, the airline said it was extending its partial lockout until October 23.  A statement issued later said, "The management hopes to resume operations on November 6."

Several rounds of talks between the staff and the management have failed and the impasse has continued. A crucial meeting last Thursday too remained inconclusive. The management has offered payment of a month's salary, but the staff say that is unacceptable.

A Kingfisher statement on Friday quoted Prakash Mirpuri, Kingfisher's vice-president of corporate communications, as saying, "We had a positive meeting with employee representatives on October 17 and are hopeful of reaching common ground when we meet again next week."

With inputs from Press Trust of India