Jet Air stop-loss just sent banks deeper into loss

Cogencis, Thursday, Apr 18

Pulling the plug is always a heart-wrenching affair. At the end, someone has to decide. The financially doddering Jet Airways flew its last flight, at least for a while, on Wednesday after the State Bank of India refused to infuse funds on an interim basis that would have kept it flying.

While shareholders of Jet Airways had in February approved the conversion of loans into equity, which would effectively give banks 51% control of the airline, stock exchange data continues to show Naresh Goyal and associates collectively owning 51% stake in the airline.

As a sign of possible remorse and concerned over bad publicity, SBI sent a statement justifying that financial bids by potential investors was the only way to assess the fair value of Jet Air.

By suspending funding to the airline, State Bank of India and other lenders have compromised the process of ascertaining the fair value of Jet Airways.

In one swift move, the bankers eroded over 30% of the airline's market value with the stock plummeting to its lowest in 10 years today.

Investors had held on to the company's shares in hope that an investor would eventually be found, and value would be rebuilt.

While spending good money after bad money is not wise and taking a stop-loss view is pragmatic, the fact is the lenders had agreed to infuse 15 bln rupees in emergency funding. Balking after making a financial commitment reeks of irresponsibility, and could mark a new low for the banking sector.

The practice of 'accommodative lending', or temporary funding, to tide over a crisis is not new to public sector banks, who have in the past made such 'accommodation' on just a phone call from New Delhi. Has something changed?

Did the arrest of Yogesh Agarwal, the former chairman and managing director of IDBI Bank, who was sent behind bars in 2017 for "undue favours" to the now-defunct Kingfisher Airlines trigger concern of a likely political witchhunt later?

Cetris paribus, the assurance from banks made the management of Jet Airways give the aviation regulator a schedule of increasing the fleet size to 75 by the end of April from the 10 they were flying. At its peak, the airline had a fleet of around 120 aircraft.

Based on that assurance, other allied businesses too made plans, and now they face collateral damage. Not to mention the public – many deferred ticket purchases hoping fares would come back to affordable levels.

The airline business is not a plug-and-play model. Even if funding were to come now either from lenders or a new investor, there will be not many aircraft that Jet Airways will get for love or money.

SpiceJet has reportedly taken on lease many of the aircraft once flown by Jet Airways. A new investor too will not be able to find aircraft for Jet Airways to fly even if equity is infused.

It is a long road ahead for Jet Airways and an even longer one for lenders to recover their funds. A stop-loss view by banks may just have triggered more losses for them.  End

Other News.

RBI warns tough yrs ahead for states, calls for charting fiscal path

Cogencis, Tuesday, Oct 27, 2020 NEW DELHI – The Reserve Bank of India has warned state governments face a difficult few years, while also calling on them to chart out a glide path for consolidating their debt. "The next few years are going to be challenging for the Indian states. They need to remain empowered […]

Pricing power to give wings to low-cost airlines

With airlines likely to hike fares, it’s an opportune time for them to shore up bottomlines and emerge more economically sound, what with the Indian consumer seemingly not as averse to higher fares as before.

YES Bank gets a big NO as analysts cut price aim

Most brokerages have advised investors to sell the YES Bank stock. However, despite a revision in price aims, analysts’ estimates remain in a wide range, indicating lack of consensus on the bank’s future performance.