Jet Airways’ Banks May Need To Swallow A 75% Haircut On Their Loans

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This sounds a little extraordinary, that the varied lenders to Jet Airways will need to swallow a 75% haircut on the loans they made to the company. It’s not on a trivial sum either, Rs 14,000 crore is mentioned as a total sum. The problem here being that there aren’t really all that many assets to back that up. This then telling us something about Indian banking, that politically favoured companies can indeed borrow in a manner that might not be all that economically wise.

Lenders to Jet Airways might be staring at a rocky path ahead of them as the bidders have asked for a haircut of 70-75 per cent on the total debt. According to a source close to the development, potential investors including Etihad Airways, the Hinduja Group and AdiGro have asked for a steep haircut from the lenders as a pre-condition to picking up an equity stake in the company. Jet Airways owed ₹14,000 crore to financial and operational creditors before the temporary shutdown of operations on April 17.

Remember how Jet actually went down. It was leasing its planes and a lease has that security against the aircraft hull. Jet was failing to make payments on planes and so they were progressively grounded. At least one report says that they could only actually use 9 of their fleet by the time the end came. All the others were grounded for non-payment on those leases.

The debt we’re talking about here might include that lease debt – but no one will be asked to take a 75% haircut when there is security. This is debt owed by the company in general we’re talking about here. And clearly and obviously there’re no real assets to back it up.

If there were then creditors – who arguably own the company now while it’s in administration – would be better off moving to liquidate the airline rather than attempt to sell it on with such haircuts.

Which leads to the interesting question here. How was Jet able to run up such debts?