Fund-starved Jet Airways has defaulted on payment of interest and principal installment to a consortium of banks led by State Bank of India (SBI) as the airline’s initiatives to raise a Rs 1,500 crore short-term loan in order to meet its working capital requirement and payment obligations failed to materialise on time. Rating agency ICRA on Wednesday downgraded the airline’s Rs 10,963 crore loan and debenture ratings to the ‘D’ category Instruments with ‘D’ rating are in default or are expected to be in default soon. Jet Airways shares plunged 6.16 per cent to Rs 263.75 on the BSE following the delay in loan repayment.
“This is to inform you that the payment of interest and principal installment due to the consortium of Indian banks (led by State Bank of India) on December 31, 2018 has been delayed due to temporary cashflow mismatch and the company has engaged with them in relation to the same,” it said in a stock exchange filing. The company’s liquidity position is stressed, with operating losses, high debt levels and a negative networth
According to ICRA, the ratings downgrade considers the delays by the company in the payment of the interest and principal installment due on December 31, 2018 due to cash flow mismatches. “There have been delays in the implementation of the proposed liquidity initiatives by the management, which have aggravated its liquidity. The company has already been delaying its employee salary payments and lease rental payments to the aircraft lessors,” it said.
Though the airline has been in discussions with banks for a short-term loan, cautious bankers asked for a concrete plan for the revival of the airline after they burnt their fingers in Vijay Mallya’s Kingfisher Airlines episode. Naresh-Goyal-run airline’s efforts to bring in an investor has not worked out so far. The Tatas had evinced interest to buy stake but the talks got stuck over various thorny issues. “Banks asked for revival plan and more collaterals,” said a banking source.
Airlines’ financial flexibility depends on fuel prices
Even as the airline managed to contain its costs to an extent, Jet Airways’ financial flexibility depends largely on fuel prices – that have subsided in the last few months – and the opportunity to increase fares in a highly competitive sector. On Tuesday, the price of aviation turbine fuel was cut by Rs 9,990 per kilolitre to Rs 58,060.97 per kl. The two consecutive reductions have brought jet fuel rates to their lowest levels in a year providing much-needed relief to cash-strapped airlines. Further, the airline’s ability to repay its debts also depends on its ability to raise fresh funds.
The airline has large debt repayments due over December 2018 to March 2019 (Rs 1,700 crore), FY2020 (Rs 2,444.5 crore) and FY2021 (Rs 2,167.9 crore).
Credit profile of the company continues to remain stretched, characterised by negative networth and high leverage. “Jet Airways continues to have negative networth due to accumulated losses and diminution in the value of its investments in its subsidiary Jet Lite (India) Limited,” ICRA said.
Furthermore, the liquidity strain has aggravated due to delays by the company in implementation of its liquidity initiatives. As on September 30, 2018, the company had gross debt of Rs 8,411 crore, as against Rs. 8,403 crore as on March 31, 2018. This is despite the receipt of lease incentives during June 2018 and advances from JPPL in October 2018.
The debt levels are, however, expected to increase in the near term because of the ongoing stress on profitability, unless the company is successful in its liquidity initiatives. “Overall, till the company starts reporting profits on a sustained basis, the debt levels are expected to continue to remain high,” it said. It had posted a loss of Rs 1,297 crore on a revenue of Rs 6161.15 crore for the quarter ended September 2018.
The company had already been delaying payments of employee salaries and lease rental payments to the aircraft lessors on account of the liquidity stress. In the absence of adequate cash accruals, the company will be required to refinance its repayments falling due.
“While it has been undertaking several liquidity initiatives, timely funds tie-up is a key rating sensitivity. Timely implementation of proposed liquidity initiatives by the management to alleviate its liquidity strain would remain critical to its credit profile,” ICRA said.
The company is undertaking various liquidity initiatives, which includes, among others, equity infusion and a stake sale in Jet Privilege Private Limited (JPPL), and the timely implementation of these initiatives remain critical to its credit profile. The company has already renegotiated its maintenance contracts with effect from January 01, 2019, with estimated savings of $ 100 million annually. The company has also planned several initiatives aimed at significant reduction in costs.
However, the cash flows would largely depend on the jet fuel prices and the ability of the company and the industry to pass on the increase through increase in fares. Of the 124 aircraft operated as on September 30, 2018, 16 are owned, providing opportunities for monetisation. A sale and lease back transaction for the same would help reduce the debt burden, rating firms said.