Saturday, December 7, 2013

Rising Defaults II: Kingfisher on ground, banks' money up in the air

Aneesh Phadnis  |  BS  :Mumbai  
 Last Updated at 00:42 IST
Mallya, who sold off his United Spirits to Diageo for $1 billion
 early this year, has not used this money to repay bank loans

About a year after Kingfisher Airlines shut shop, the only 
one still confident of a revival of the airline is Chairman 
Vijay Mallya. Just two months ago, the flamboyant promoter 
of Kingfisher Airlines and the UB group announced he was
 in talks with an investor to sell the airline. He had given a 
deadline of 90 days for the sale.

But as days pass, few share Mallya’s optimism. Slowly, 

Indian banks are realising they aren’t left with much, in terms
 of their loans to the airline. Mallya, who sold 25 per cent in
 his United Spirits to Diageo for $1 billion early this year, 
didn’t use this money to repay the loans. The 14 banks,
 led by State Bank of India (SBI), which lent Rs 6,500 crore
 to the airline, are now involved in litigation over the money
, as Mallya has sued them in multiple courts. Bankers say 
they started the recovery process in March 2013, as the
 company’s dues had exceeded Rs 2,400 crore.

Not just banks, investors and employees of Kingfisher

 Airlines are also going home empty-handed. The airline’s 
stock has seen a steady decline — from its peak market
 value of Rs 3,888 crore in 2007, the company’s value has 
fallen to Rs 407 crore. The stock is being quoted at about
 Rs 5. The airline’s employees haven’t received salaries for
 the last year-and-a-half.

Kingfisher Airlines took off well in 2005, even carving a

 niche for itself. But a Rs 550-crore deal in 2007 to buy 
out Gopinath’s Deccan Airways, along with other sundry
 mistakes, pulled it down. Today, Mallya owes money to
 banks, employees, tax officials, caterers, aircraft leasing 
companies, fuel supplier Hindustan Petroleum Corporation
 and to taxi operators, too.

Kingfisher Airlines did not respond to an email query 

seeking comment.

The entire aviation industry has seen difficult times. “The reason

 for airlines making losses has been a high increase in fuel cost
 through the last couple of years, coupled with weakening of
 the rupee. Further, interest costs have also increased due to
 the purchase of new aircraft. The increased costs due to all
 these factors cannot be directly passed on to customers in
 view of the price war among airlines,” says M P Chhajed, 
a city-based auditor.

Banks, meanwhile, started selling shares of United Spirits and

 Mangalore Chemicals and Fertilisers, given as collateral
 against the loan, and netted about Rs 600 crore. That is
 all banks have secured so far; their recovery drive has been 
stymied by the airline challenging all claims against it. In March 
this year, UB group moved the Bombay High Court against the 
sale of shares, but secured no interim relief. In May, the
 lenders recalled the entire loan of about Rs 6,000 crore, 
asking Mallya to return the entire amount at once.

Through the last eight months, UB group and the lenders have 

been at loggerheads over the possession of Kingfisher House,
 the airline’s office here, and Mallya’s villa in Goa. Both properties
 were given as security against the loan. To recover the dues, 
the lenders have also filed applications in the Debt Recovery 
Tribunal (DRT) Bangalore. “The presiding officer of DRT 
Bangalore has heard the banks, but Kingfisher's defence 
against the interim applications is yet to be heard. In the 
interim application, banks have sought a declaration of 
assets, injunction against delineation of properties, attachment
 of properties and such other relief,” said a banker privy
 to the development.

“We will not be able to generate more than Rs 1,000 crore through

 the sale of shares and from the Mumbai and Goa properties,”
 the banker said. Therefore, the case before DRT is crucial, 
as an order will allow lenders to lay claim even on Mallya’s 
and UB group’s personal and non-pledged assets. However,
 the tribunal was overburdened and a final recovery order in
 the Kingfisher case might take years, lawyers say.

The Karnataka HC, while hearing a winding-up petition against the

 airline, asked banks to maintain status quo, with regard to the 
company’s Mumbai office, till December 6, as the airline said 
it was in talks with investors for a revival. A local court in Goa
, too, stayed banks’ attempts to take possession of Mallya’s 
villa in Goa. Two days ago, banks secured a restraint order 
from DRT against UB group company Kingfisher Finvest, 
restraining it from transferring any property or dealing with 
the proceeds from the sale of its shares.

If this year has been marked by acrimony, 2010 was a period 

of bonhomie between the airline and its lenders. In a controversial 
decision in November 2010, public sector banks, failing to read
 the signs of a financially sick airline, restructured Rs 7,650 crore 
of debt, converting a portion of it into preferential shares. 
The banks announced a two-year moratorium on the repayment,
 reduced interest and additional funding. After the restructuring,
 the airline’s total debt fell to Rs 6,300 crore.

To worsen matters, in March 2011, Rs 750 crore of preferential 

shares issued to banks was converted into equity shares at Rs 64.48
 a share, a premium of 61 per cent. During that quarter, banks and
 other financial institutions held 23 per cent stake in the airline
. A year later, when the lock-in period for shareholding ended, 
banks started selling shares at a loss, reducing their holding 
to 13 per cent.

The banks had hoped the debt restructuring would provide a 

breather to the airline and allow it to restructure its operations.
 On its part, the airline announced plans to reduce debt and make
 changes in its business model. Till then, the airline ran two
 service models (the full-service brand and the no-frills service
, introduced after the airline bought Air Deccan).

The airline estimated the reduction in finance costs and tweaking

 the business model would lead to gains of Rs 2,190 crore.
 It firmed up plans to hive off its ATR operations, loyalty programme
 and engineering unit into separate companies, none of which 
materialised. Despite a generous debt recast, the airline was
 unable to generate profits. In fact, it didn’t record profits in its 
seven years of operations. 
By March-end 2013, the airline’s accumulated losses stood
 at a staggering Rs 16,000 crore.

By December 2011, about a year after the debt restructuring, 

SBI said Kingfisher loans had turned bad. The bank had
 exposure of Rs 1,500 crore to the airline. Soon, other 
banks declared Kingfisher loans non-performing assets (NPAs).
 Following this, the airline made a pitch for additional loans
, but these were denied. Then, the airline approached smaller 
banks in the consortium, banks that hadn’t categorised the
 loans as NPAs. A series of meetings between banks and 
Kingfisher Airline executives followed. Mallya then made a
 few presentations, outlining revival plans for the airline.
 In October 2012, the airline stopped operations, after 
engineers stopped work due to non-payment of salaries.
 The Directorate General of Civil Aviation suspended the airline
’s operating permit. As for the sale of the airline, Mallya remains optimistic.


* Nov 2010: Banks restructure Rs 7,500 crore loan. 

A portion of the loan was converted into equity, fresh funding 
granted and repayment term extended

* January-March 2012: Banks begin to declare KFA loan

s as NPA after the airline fails to service interest

* October 2012: Kingfisher shuts operations

* March 2013: Lenders sell pledged shares of United Spirits

 and Mangalore Chemicals and Fertilisers Ltd

* April 2013: Kingfisher moves Bombay High Court against 

sale of shares, does not secure relief

* May 2013: Lenders recall Kingfisher's entire

 Rs 6,000-crore loan

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