Even as many people have commenced paying their last respects to Kingfisher Airlines, the worst affected in case the airline fails to take-off again are probably the banks and financial institutions that have a huge exposure to the airline, with the State Bank of India (SBI) in the lead.
Employees are being paid their salaries in quarterly instalments and the tax department their dues in daily deposits. The former has the option of seeking greener pastures and the latter the option of attaching the bank accounts to collect its dues.
The only option that the banks have is to resort to the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), which permit them to take over the assets of the borrower and dispose them of to recover what they can and set it off against their dues.
Hypothecated company
Kingfisher Airlines has hypothecated itself hook, line and sinker to the lenders.
The term loans are secured on the basis of the purchase agreement entered with the aircraft manufacturer for purchase of the aircrafts, with a second charge on the fixed assets of the company and an additional personal guarantee by a director of the company.
This probably explains why Mr Vijay Mallya has had to decline another personal guarantee to evergreen the loan — the first personal guarantee itself could short-change him by a few hundred crores.
Aircraft have also been hypothecated for the term loans. The working capital and other loans have been secured by hypothecation of all movable assets.
Assets available for hypothecation include — those acquired on hire purchase/lease basis, all trademarks and goodwill of the company, all credit card receivables, IATA collections and other receivables of the company and mortgage of Kingfisher House.
The company has also furnished non-disposal undertakings in respect of aircraft taken on finance lease.
Term loans from others have been secured by hypothecation of aircraft and assignment of documents to title to such assets, second priority on mortgage of aircraft, hypothecation of furniture and fixtures and ground handling equipments.
The freezing of the bank accounts to ensure collection of service tax dues has ensured that even the cash and cash equivalents are hypothecated.
The key question is whether the banks and FIs would contemplate initiating action under the SARFAESI Act. The timing of such action would be very critical since these are the ‘known knowns' in terms of liabilities — there could be ‘unknown unknowns' which may crop up later.
REVIVAL OPTIONS
It would appear that the decision of the lenders would depend on whether the airline continues as a going concern or shuts shop.
Action under SARFAESI would be initiated only when all options to continue the airline fail. Kingfisher Airlines would certainly not fall into the “too big to fail” slot, whatever the merits of that mantra are.
Historically, the government has ensured that corporate entities with some brand name have not been extinguished — both Global Trust Bank and Satyam were given away to eligible suitors.
Other airlines who are not exactly in the pink of health would take two steps backward when offered Kingfisher due to the large debt overhang and the beating the brand has taken. They would probably consider it if they are given an offer they can't refuse — in terms of price and other conditions.
Instead of resorting to the SARFAESI provisions, the lenders have another soft option in case the airline continues to fly — remove the debt from their balance-sheet and park it in an asset reconstruction company.
The largest lender to the airline, State Bank of India (SBI), should certainly be thinking about this possibility, being one of the promoters of the Asset Reconstruction Company of India Limited (ARCIL).
However, asset reconstruction in India has not really taken off as an industry due to a host of factors. ARCIL has had problems of its own with an RBI inspection forcing a restatement of its accounts last year due to inappropriate accounting policies.
Asset reconstruction companies (ARCs) invariably take over troubled assets through trusts by issuing security receipts.
Whether these trusts have the power to possess hypothecated assets is another issue that has not been completely resolved. A comparison of the free cash flows of the airline with the debt would be sufficient to put off ARCs.
It appears that ARCs would evince interest only if a Greek-debt-type solution is hammered out for the airline — with, however, with no guarantee that the solution would work.
Seizing Kingfisher's assets under the SARFAESI Act is easier said than done.
(The author is a Bangalore-based chartered accountant)