NEw Delhi/Mumbai: Inadequate collateral and weak cash flows are likely to be key challenges for airlines seeking one-time loan restructuring after the loan moratorium ends on 31 August, bankers and airline executives said.
The Reserve Bank of India (RBI) has appointed a five-member panel led by former ICICI Bank chief executive K.V. Kamath to prepare a report by 6 September on the criteria to recast covid-19 related stressed accounts. Airlines remain engaged with lenders, but a final decision can be taken only after the committee’s recommendations.
Airlines are in desperate need for working capital, but bankers are not very keen to fund the recovery of the sector.
“Banks want promoters of these companies to bring in fresh equity," said an airline industry executive. “However, given that the aviation sector may take longer than the other sectors to fully revive, most companies may find it difficult to raise fresh equity in the tough market," he said requesting anonymity.
InterGlobe Aviation Ltd, which runs India’s largest airline IndiGo, on 10 August said it will raise up to ₹4,000 crore ($533.70 million) by selling shares to institutional investors. However, with air travel expected to remain muted for an extended period, most airlines are banking on funds from promoters.
“Airlines today follow the asset-light approach to trim costs and thus have minimal assets that can be kept as collateral to raise money from lenders," said a second person, a senior executive with a low-fare airline. “Banks are hesitant to lend to a stressed sector, especially after closure of airlines such as Jet Airways and Kingfisher Airlines, which owed huge amounts to them. This creates a liquidity problem, especially during a crisis like this," he said.
Indian airlines are expected to report consolidated losses of $6.0-6.5 billion in FY2021 and an estimated $4.5-5 billion of funding will be required to overcome this crisis, aviation consultancy firm Capa India said in a recent report.
“Based on our continuous research and monitoring of the industry since the covid crisis took hold, we have come to the conclusion that no individual stakeholder, whether a promoter, a bank, a private equity fund or the government, is willing to make the first move to fund the recovery of an operator," the report said.
“Their fear is that if they act alone and others do not play their part, recovery may remain elusive and it will be a case of throwing good money after bad," it said.
“Aviation is one of the sectors that needs immediate relief and that can be possible only through the new debt recast window. Moreover, unless the leverage ratio is decided by the Kamath committee, bank boards are only framing detailed policies for retail assets and are largely following RBI’s pointers on stressed corporate loans," a top official with a public sector bank said under condition of anonymity.
Lenders are unsure if airlines can service debt even if repayment periods are stretched by two years, said a second lender.
“Moreover, we will have to convert some of the debt into equity or zero-coupon bonds because it would not make sense to simply elongate the repayment deadline. Banks will have to take a haircut in the process," said the second banker.
Meanwhile, Capa India said airline and airport promoters will need to present well-thought out recapitalization plans to fully fund their companies through FY2021 and FY2022 to emerge from the ongoing crisis.
“A positive outcome will only be achieved if all stakeholders (promoters, the government, and lenders) work in concert with each other and if financing is accompanied by structural reforms at a company and at an industry level," it said.
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