Kingfisher Airlines (KFA) is a classic case of closing the stable door after the horse has bolted. This incident has generated a lot of heat inside and outside Parliament. Let’s view the whole issue dispassionately.
The account of KFA was restructured in 2010 when 30% of term loan was converted to equity (without taking controlling stake or appointing any one on the Board of the company, as is done now for strategic debt restructuring), and a portion of working capital was converted to term loan, i.e. Working Capital Term Loan (WCTL), indicating that there are no assets to support this portion of debt. This happens either because of losses or diversion of funds. The rating was below investment grade. Additional limits were sanctioned to keep it afloat.
An introspection reveals that bankers should have pulled the plug in October-November 2010, when deep restructuring was undertaken. Despite this, KFA made a desperate attempt to borrow small sums from individual banks; their borrowing from the United Bank of India (UBI) in January 2012 of R7.5 crore on the strength of letter of comfort by SBI became the rallying point based on which the UBI was first to declare Vijay Mallya and other directors as wilful defaulters (September 1, 2014). When the UBI demanded repayment of this small amount, the management brusquely turned it down and the SBI letter of comfort remained only a piece of paper.
12/03/16 Deepak Narang/Financial Express
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The account of KFA was restructured in 2010 when 30% of term loan was converted to equity (without taking controlling stake or appointing any one on the Board of the company, as is done now for strategic debt restructuring), and a portion of working capital was converted to term loan, i.e. Working Capital Term Loan (WCTL), indicating that there are no assets to support this portion of debt. This happens either because of losses or diversion of funds. The rating was below investment grade. Additional limits were sanctioned to keep it afloat.
An introspection reveals that bankers should have pulled the plug in October-November 2010, when deep restructuring was undertaken. Despite this, KFA made a desperate attempt to borrow small sums from individual banks; their borrowing from the United Bank of India (UBI) in January 2012 of R7.5 crore on the strength of letter of comfort by SBI became the rallying point based on which the UBI was first to declare Vijay Mallya and other directors as wilful defaulters (September 1, 2014). When the UBI demanded repayment of this small amount, the management brusquely turned it down and the SBI letter of comfort remained only a piece of paper.
12/03/16 Deepak Narang/Financial Express
