It’s a bad move! Don’t make banks buy Jet Airways

Business historians and management gurus will for a long time study and hold up Jet Airways’ sudden descent into near bankruptcy as a lesson in how not to run a business. From a market leader, the once-proud airline is fighting to stave off bankruptcy and is struggling to make normal interest payments. The airline has failed to pay salaries and its planes are being impounded by lessors, leaving it with perilously little capacity to cater to burgeoning passenger demand. It may not even have enough money to pay for normal operations in the coming weeks.

While Naresh Goyal & Co’s alleged mismanagement and operational and strategic failures will no doubt be studied, what should also be kept in mind are some key learnings about the way the crisis has been handled. It must now be clear that the ability of lenders to manage this tricky process of selecting a bidder to take control of a company outside the bankruptcy process is rather weak. They don’t hold all the cards and are forever at the mercy of bidders with deep pockets and willing to wait it out or strike a better deal.

Banks’ failure so far here should be seen in conjunction with what happened in the case of Reliance Communications — another high profile case which filed for bankruptcy last month. The results here have been even more disastrous.

ET’s finance editor M C Govardhana Rangan wrote last month that the delay in initiating a resolution process under the bankruptcy law is reflected in the decline in the market value of RCom which is now onetenth of what it was in January 2018. Swedish equipment maker Ericsson dragged RCom to the bankruptcy court in September 2017, but lenders waited for a restructuring plan to work out, which didn’t happen. Finally, RCom filed for bankruptcy in February 2019, but the damage was done. It’s anybody’s guess how much the lenders will be able to recover out of the $7 billion owed by the firm.

Jet Airways is of course a different case and its account is not yet a non-performing asset. It has been able to regularise its default in December though it announced recently that the payment on a foreign currency borrowing has been delayed which could make it vulnerable to a bankruptcy filing.

Also, it would be completely unfair to blame banks for all the problems leading up to the failure of the restructuring plans of both Jet and RCom. It is always difficult to deal with two rival promoters who are just not willing to see eye to eye and one can never predict with certainty how governments and regulators will react to a particular transaction. But what is clear, at least in the case of RCom, is that a bankruptcy process could have been initiated long back, giving banks a chance to recover some of their money.

In Jet, the inevitable is now staring at banks. The near-collapse or collapse of the deal means banks are now back to the drawing board. But the problem for banks is compounded by the fact that the bankruptcy law has completely changed the rules of the game. Promoters of defaulting firms were in control in the pre-IBC era, and lenders, depending upon the level of indebtedness, were at their mercy. Outsiders had little chance and everything hinged on what the promoters wanted. The tables have completely turned now.

In the bankruptcy process, the promoters are out, the creditors have power, while rivals and prospective bidders have even greater power. This is because they are now in a position to squeeze out the best terms from banks and buy the assets for a pittance — something they had never been able to do earlier. Add to this the fact that they don’t have to deal with troublesome promoters and it makes enormous sense for rivals to bide their time and get the best possible deal.

Does it make sense for the Tata group to buy Jet now? It probably does. But it probably makes even greater sense for them to buy it in a bankruptcy court given that they won't have to deal with either Mr Goyal or Etihad and can get the best terms from banks and pay next to nothing.

The task for banks in Jet now is this. Persuade warring promoters to bury the hatchet and settle for a deal or persuade a rival or an outside bidder who holds all the cards to buy now instead of waiting and biding his time.

Reports of a governmentsponsored move to bail out Jet by making banks pump in equity are quite troubling. The government may have its own reasons, given that this is an election season, but banks will end up bearing the cross on this. There is no guarantee that a buyer will be found in three or six months’ time.

Such a move may staunch the temporary bleeding but Jet’s market share and brand value will suffer without quality and purposeful management — something that banks cannot provide on their own.

Everybody involved in this should remember what happened in the case of Kingfisher. Banks converted some of their loans into equity and restructured debt in 2010 only to watch helplessly as their equity value disappeared without a trace and Kingfisher defaulted and went bankrupt.

Banks lost money both in debt and equity. They should be very wary of doing anything that may lead to the same result.