Indian government approves airlines to borrow $1 billion overseas, but delays FDI

The government of India will allow aviation companies to borrow up to $1 billion (Rs. 5,100 crore) collectively and up to $300 million individually, from overseas, via the external commercial borrowings (ECB) route, as per a statement released by the finance ministry today.

In his Budget speech last month, the Indian Finance Minister had announced that companies in the aviation sector would be allowed to avail of ECBs for a period of one year for working capital/re-financing of outstanding working capital rupee loan(s).

Quoting from the statement

The ECB made under this provision would have a maximum ceiling of USD 1 billion for the entire Civil Aviation sector. The limit for individual airline companies would be US$ 300 million. This limit can be availed either in a lump sum or in tranches depending upon the utilization of the limit during the 1 year when the facility is available.

The government statement also acknowledges the distress faced by the Indian airline industry

The rapid growth of the Aviation sector in India has generated demand for additional finance for working capital and capacity expansion. High operating costs, particularly on account of high fuel costs, have put additional stress on the Airline Industry.

but the politically weak UPA-2 government of Prime Minister Dr. Manmohan Singh is unable or unwilling to take even the slightest of steps to help the sector.

Even the almost concluded proposal to permit up to 49% foreign direct investment (FDI) by foreign airlines in to Indian carriers, which was expected to be approved by the Cabinet today, appears to have been put on the back-burner, indefinitely, with no less than the Prime Minister himself, referring the issue back to a "group of ministers" with a directive to "establish consensus".

With the loss of the municipal elections in the national capital Delhi, the Congress party, is unsure of its so-called allies the Mamta Banerjee led TMC, and Sharad Pawar and Praful Patel led NCP. A school of thought believes that FDI is essentially shelved, due to the friendships of former civil aviation minister, Mr. Patel, with Jet Airways and IndiGo, both of whom are opposed to FDI, as it will benefit their competitors Kingfisher, GoAir, and SpiceJet, and will hurt them by forcing them to dilute their promoter stakes. Another school would have you believe the Prime Minister is playing it safe, having learned its lesson, when it suffered terribly, in the last parliamentary session, with the government being forced to retract an approval to permit FDI in retailing.

The statement also goes on to say

Proposals of individual companies would be considered by RBI [Reserve Bank of India] under the approval route based on the parameters such as cash flows and the capacity of individual companies to repay these loans from their foreign exchange earnings. In order to increase access to ECBs, RBI would consider relaxation in the average maturity period for ECBs above USD 20 million from five to three years.

This policy decision will provide an additional source of capital low cost to the Airline Industry and help them tide over their present financial crunch. RBI is expected to issue relevant circular/notification giving effect to the aforesaid Budget announcement within 7 days.

As if foreign currency denominated asset loans weren't bad enough, now the government wants airlines to borrow working capital also in foreign currency. This at a time the Rupee is going up and down like a yo-yo. Borrowing is not going to solve the problems of the airlines. It is merely delaying the oncoming freight train of financial destruction.

What are your thoughts on this half-baked approach by the government?

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Kingfisher Airlines repeats fund raising plans - a move to ease market concerns?

Dr. Vijay Mallya promoted Kingfisher Airlines released this statement today. The conversion between Indian Rupees and US Dollar at a rate of Rs.47:$1 has been added by us in italics.

The Board of Kingfisher Airlines Limited, at its meeting held today, approved, subject to shareholders approval, an increase in the authorised Equity Share Capital from Rs. 900 crores [approx $192 million] to Rs. 1,650 crores [approx 352 million] and an increase in the authorised Preference Share Capital from Rs.100 crores [$21.3 million] to Rs. 2,600 crores [$553.2 million].

The Company will immediately seek to raise up to US Dollars 250 million [Rs. 1175 Crore] by way of GDR [global depository receipts] and a further Rs. 500 crores [$106.4 million] through a domestic offering subject to necessary regulatory approvals. This funding is expected to be completed within the next 3-4 months.

At the meeting of the Board of Directors of United Breweries (Holdings) Limited, the Holding Company of Kingfisher Airlines, it was resolved that a sum of approximately Rs. 650 crores [$138.29 million] provided as loans to Kingfisher Airlines be converted into Preference Share Capital.

The financials of Kingfisher Airlines are expected to be significantly strengthened by these initiatives.

Today's decisions appear to be just a re-state of earlier attempts by the airline to raise funds.

The airline has accumulated debt exceeding Rs. 7400 Crore (approx $1.58 billion) and reported a lower net loss (down 23%) of Rs.1,647.22 crore ($350.5 million) for the fiscal ended March. There is a significant erosion of the net worth of the carrier.

The airline is not alone in its financial woes. Fellow full-service carriers Jet Airways had debt of Rs. 13,759.50 crore ($2.93 billion) as of 31 March. National carrier Air India’s debt exposure was Rs. 17,000 crore ($3.62 billion) in May.

Industry sources feel that investors are more comfortable placing their funds with either Jet Airways or low fare carrier IndiGo whose initial public offering is expected within the next 12 months. However, with the government of India prohibiting foreign carriers from owning any stake in an Indian airline, it will be difficult for Kingfisher airlines to raise external commercial borrowing without a significant dilution of promoter equity. Said one source

Despite efforts, Kingfisher still does not enjoy a reputation of a lean and mean airline. If the airline does manage to raise the funds, Dr. Mallya's share will fall well below 40%; and that is a very uncomfortable position for a promoter to be in.

In May, while the Economic Times was reporting IDBI bank recalling its loans from Kingfisher Airlines, the carrier had approached its lender the State Bank of India to re-structure its debt outside the corporate debt restructuring cell. As per banking guidelines a debt re-structuring within the cell implies the loan is considered bad, and this would all but erase any hopes of the airline to raise additional debt.

In June, the State Bank of India, approached the nation's central bank, the Reserve Bank of India (RBI) with a special dispensation request to restructure the over $10 billion debt of Indian carriers after the RBI refused the bank's request to advance a loan of Rs. 2,000 Crore to Kingfisher Airlines. In July, the central bank instructed 13 of the nation's largest banks to form a common policy and consortia for debt restructuring rather than provide on- time relief to individual companies.

The airline's parent, the UB Group, has been busy selling non-core assets and business to raise funds and pare down overall debt. The lack of funds injection by the group till now, gave rise to doubts on how much additional airline burden were the shareholders of UB Group willing to bear. The move by United Breweries (Holdings) of converting Rs. 650 crores provided as loans to the airline, appears to be converting loans, that may never return, in to equity which will at least provide some buttress when external lenders demand a share of the airline.

All is not lost though. The airline has reported improved financial results for the quarter ended June 30. In its investor presentation, the airline is showing the benefits of its aggressive cost cutting. However, we do not share the airline's optimism on the benefits it will gain by its early induction in to the oneworld alliance. The alliance will surely squeeze far more concessions out of a financially weaker Kingfisher than it will concede in benefits.

While we hope we are wrong, for now we cannot shake off the feeling that this release appears to be just another attempt by the airline to ease market concerns on its precarious financial condition.

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