Debt recast for Kingfisher may be only option for banks

Lenders to Vijay Mallya-promoted Kingfisher Airlines may have no option other than restructuring the carrier's loans again.

In case of a second restructuring, banks have to classify the asset as non-performing, which requires higher provisioning.

Bankers are working on a formula that would aim to keep the re-payment period and the net present value of the asset specified during the first restructuring intact, by increasing the interest rate.

In this case, there would be no increase in the provisioning requirement. However, such an exercise can only be carried out if the asset is standard, and not slipped into the sub-standard category.

Banks' loan to Kingfisher is still in the standard category, since the company is servicing the loan by paying interest.

"Even if we keep the net present value intact, while carrying out the second restructuring, we would need the regulator's permission to classify the loan as standard," said a banker.

Bankers said a second round of restructuring was the only way out, even if this meant classifying the loan as non-performing asset.

"If we do not restructure, it would be difficult to recover the loan. In case we want to sell the assets, it can only happen at a discount," said an official of a bank with exposure to the airline.

Banks have total exposure of close to Rs 7,000 crore (Rs 70 billion) in the airline, and Rs 4,000 crore (Rs 40 billion)

of this is a term loan. Banks also have equity exposure in the airline.

Pratip Chaudhuri, chairman, State Bank of India, the leader of the lenders' consortium to Kingfisher, said it was difficult for the bank to stop fresh loans to airline companies.

On whether the bank would extend fresh loans to airline companies, Chaudhuri said, "It depends…Maybe new companies no (fresh loans), but for existing companies, you cannot walk out because then, the existing exposure becomes a jeopardy."

He added the aviation sector was suffering from over-capacity. Chaudhuri said the airline had not requested for any fresh loan.

Separately, the airline's promoter, Vijay Mallya, said the company would need Rs 700-Rs 800 crore (Rs 7-8 billion).

Even if the banks agree to restructure the loans again, they are likely to call for stringent conditions.

For instance, banks would closely monitor the revenue and the surplus of the airline, and expect promoters to pump in fresh equity.

"Kingfisher Airlines has a huge amount of debt on the balance sheet, and has never made a profit since its inception. Despite the company working hard with lenders for corporate debt restructuring, business viability is a big challenge. Going forward, promoters would need to infuse more capital in the company to ensure viability and existence in a tough market scenario," said D K Aggarwal, chairman and managing director, SMC Investments and Advisors Limited.