In 2013, UAE-based carrier Etihad Airways mounted an expensive rescue of Jet Airways (India) Ltd. by paying a close to 50 percent premium to the prevailing market price to acquire a 24 percent stake in the Indian airline. Then too, Jet Airways was struggling against a mountain of debt (Rs 11,900 crore) and weak profitability (Rs 16.81 crore in the nine months to December 2012). Six years later the story may repeat. Except this time Etihad may get a cheaper deal. And no one's calling it a “gamechanger”.
Jet Airways defaulted on bank payments due on Dec. 31, 2018 amid an ongoing cash crunch and financial stress. Jet Airways had earlier said its liquidity position is stretched and it has been delaying payments to vendors and employees. This was the first time the private carrier defaulted on a loan repayment that could turn into an non-performing asset in the next 75 days.
The Naresh Goyal-led airline, which has a debt of over Rs 10,900 crore, must repay nearly Rs 1,700 crore by the end of the current fiscal. BloombergQuint reported earlier that Etihad may be requested by lenders to step up and increase its stake to 49 percent. The question is how far will that take Jet?
If Etihad is supposed to infuse funds then, Jet can't issue more than 5.6 crore equity shares to Etihad. That is because Indian regulations cap airline ownership by foreign operators at 49 percent.
At the current market price it would cost Etihad about Rs 1,700 crore, just enough for Jet to tide over the financial year. Given the depth of Jet's financial problems, the bigger the fund infusion the better as the company hasn't been able to pay employees and operational creditors. But it's also unlikely that any investor would pay a premium at this point.
Jet Airways can also issue non-convertible preference shares or debentures to Etihad for its cash requirements. However, this wouldn't give the Abu Dhabi-based airline voting rights. Etihad, in an email to BloombergQuint said it wouldn't comment on rumours or speculation.
How Fund Infusion Will Help
A fund infusion will not only reduce Jet's debt but will also improve its credit rating. From current ‘default' rating, Jet's rating will be upgraded to that of Etihad's ‘A' rating as the latter will hold majority stake in Jet. A higher rating could eventually lead to lower interest costs and extended borrowing limits from bankers for the cash-strapped airline.
Jet has been considering options, including selling aircraft, capital infusion and a stake sale in its loyalty programme, to meet its debt repayment obligation, but none of them have fructified so far. Industry analysts said that a fund infusion alone won't help the company and what it really needs is a radical restructuring in its cost structure and revenue enhancement to be more competitive.
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