MUMBAI -- Jet Airways shareholders on Wednesday will vote to back a debt for equity swap that will hand control of the troubled Indian carrier to lenders who are owed 10 billion rupees ($1.5 billion).
However, analysts are questioning the model being used to rescue Jet Airways, given the patchy record of past debt restructurings and the hit to bank asset values as a result of enlarged equity holdings even after successful swaps.
Under the deal, banks led by the State Bank of India will take a 51% stake. They are expecting to sell the shares, perhaps to Etihad Airways, the Gulf airline that owns 24% of the Indian carrier and which has been mooted as a white knight.
However, some analysts fear debt for equity swaps increase the risks to banks anxious to reduce the level of bad loans. India's financial sector was recently judged by the International Monetary Fund to have the worst ratio of bad debt among the world's major economies.
Fitch Ratings, which has warned of the rising risk to China's financial sector due to a growing number of debt for equity swaps, has voiced concern over the Jet Airways deal.
"Clearly banks are not in business of running airlines so it does seem a bit odd. Unfortunately in India, restructuring, if you go by historical data has clearly not been successful," said Saswata Guha, Director-Financial Institutions at Fitch Ratings.
Banks stepped in to rescue the troubled Kingfisher Airlines in 2011, converting its Rs 1,400 core debt to an equity stake of about 23%. Then too, lenders had hoped to sell shares once operations of the airline improved. But less than two years later the airline had ceased flying.
Bankers are still trying to recover the loans through asset sales. Meanwhile, the airline's controlling shareholder, Vijay Mallya, is facing charges of fraud in India. The U.K. -- where he fled after the carrier's collapse -- earlier this month agreed to extradite him.
Another debt for equity beneficiary, ElectroSteel Steels, headed for bankruptcy after a swap. A buyer, Vedanta, emerged three years after the restructuring. Other companies that traded equity for debt relief, such as Gammon India and IVRCL, are still looking for buyers so their lenders can make exits or bring down their stakes.
The Reserve Bank of India has noted that between 2001 and 2018 the restructuring of debt totaling some 1.84 trillion rupees, including debt for equity swaps, had failed. Only 846.77 billion rupees in loans were successfully resolved in that period.
Bad debt in India's banking sector amounted to 9.03 trillion rupees as of December 2018. Though the growth of nonperforming loans has slowed, according to latest figures, it remains unclear if all legacy bad debt has been recognized by all banks, said CARE Ratings, an Indian credit ratings agency, in a note.
India's leading proxy advisory firm, Stakeholder Empowerment Services, said the Jet Airways restructuring is a short-term solution "to bring the airline out of its current problems." The risk for banks is that the window for selling on the shares could be limited. "As long as the airline is afloat, there will be buyers. But if it goes down, like in the case of Kingfisher Airlines, there will be no buyers," said JN Gupta, founder and managing director of SES.
On Feb. 14, the Jet Airways board approved the issue of 114 million new shares to a State Bank of India-led consortium of lenders, essentially making them the controlling shareholders. The airline, on the same day, reported its fourth consecutive quarterly loss at 5.88 billion rupees for October-December.
The bank-led provisional resolution plan will now be put before shareholders, the Indian Bankers' Association, other lenders and Etihad Airways for approval.