Airlines fate depends on debt-restructuring plan

Written by Shaheen Mansuri | Mumbai | Updated: Oct 27 2010, 05:00am hrs
As Indian air carriers are awaiting a debt restructuring process ahead of their respective fund raising programmes, industry experts say, even a marginal relaxation like resetting the rate of interest and extending the moratorium period will be beneficial to the industry, saddled with a collective debt of over Rs 60,000 crore.

However, on the flip side, if the restructuring does not happen, the risk will continue to negatively impact the balance sheets of airline operators.

The RBI has asked banks to work out a special concessional package for the crisis-ridden aviation sector, in response to which the lenders said they will look into the problems on a case-to-case basis. Most large banks have an exposure to national carrier Air India with around Rs 40,000 crore debt (which includes Rs 18,000 towards working capital and Rs 20,000 crore extended for aircraft purchase), Kingfisher Airlines (Rs 6,000 crore) and Jet Airways (Rs 14,000 crore).

Ravi Nedungadi, CFO, UB Group told FE, We are working with a consortium of banks to restructure our debt but as of now, I cannot divulge any details until a final decision is arrived at. Vijay Mallya, UB Group chairman, that runs Kingfisher Airlines had recently told shareholders that in the restructuring process, there will be an interest rate reduction to an average of 11%. It will be a door-to-door tenure of nine years, with two years as moratorium and a seven-year easy repayment schedule. He even said the debt restructuring exercise also calls for Rs 900 crore of additional facilities to be provided by banks to the airline. The airline plans to raise funds of about $1 billion, including a $250-million GDRs issue, which would be planned as soon as the debt restructuring exercise is finalised, he added. Kingfisher has reported a net loss of Rs 187 crore for the June quarter of financial year 2010-11 as against Rs 243 crore loss posted in the corresponding quarter a year ago. Arvind Mahajan, executive director, KPMG Advisory Services Pvt said, The financial condition of the sector continues to be precarious, with most airlines saddled with huge debt and soaring interest burden. Though air traffic has grown enabling airlines to improve load factors, profitability is still inadequate to pay off debt and liabilities. He further said lower interest rate and increase in moratorium period, among other provisions, will ease the burden on the balance sheets to an extent.

Ambareesh Baliga, vice-president, Karvy Stock Broking said, There is a renewed buoyancy in air traffic and even fuel costs are under control which has helped the industry maintain cash flows. However, debt restructuring, if it happens, will be a saviour for airlines having an unhealthy proportion of debt in their capital structures.

Sharan Lilaney from Angel Broking adds, In the entire restructuring process, if the short term loans are converted into long term loans, the interest payments will also be scheduled for a later period. This will help the industry become cash positive against the backdrop of improvement in air traffic currently. He further adds that the rate of interest differs on a case-to-case basis. For instance, Jet Airways has major loans to fund its aircraft purchases, while Kingfisher has it towards its working capital requirement, hence the latter pays a higher rate of interest at around 14%. Also, positive credit ratings for a company help the company in getting loans at attractive rates.

Meanwhile, a Jet official says that the airline is not looking at any restructuring of its debt, as the majority of its loans are for aircraft purchase. These loans are guaranteed, long-term and at a lower interest rate. Of Jets Rs 14,818 crore debt, its short-term loans are Rs 3,000 crore. A major amount of the airlines short-term debt is working capital debt and only Rs 500 crore is in short-term debt. SBI Capital Markets is drawing up a debt-restructuring plan for Air India, which is looking at interest rates being cut to 8-9% from 12%, which will result in the carrier saving Rs 500-600 crore.