Kingfisher Airlines repeats fund raising plans – a move to ease market concerns?

Dr. Vijay Mallya promoted Kingfisher Airlines released this statement today. The conversion between Indian Rupees and US Dollar at a rate of Rs.47:$1 has been added by us in italics.

The Board of Kingfisher Airlines Limited, at its meeting held today, approved, subject to shareholders approval, an increase in the authorised Equity Share Capital from Rs. 900 crores [approx $192 million] to Rs. 1,650 crores [approx 352 million] and an increase in the authorised Preference Share Capital from Rs.100 crores [$21.3 million] to Rs. 2,600 crores [$553.2 million].

The Company will immediately seek to raise up to US Dollars 250 million [Rs. 1175 Crore] by way of GDR [global depository receipts] and a further Rs. 500 crores [$106.4 million] through a domestic offering subject to necessary regulatory approvals. This funding is expected to be completed within the next 3-4 months.

At the meeting of the Board of Directors of United Breweries (Holdings) Limited, the Holding Company of Kingfisher Airlines, it was resolved that a sum of approximately Rs. 650 crores [$138.29 million] provided as loans to Kingfisher Airlines be converted into Preference Share Capital.

The financials of Kingfisher Airlines are expected to be significantly strengthened by these initiatives.

Today’s decisions appear to be just a re-state of earlier attempts by the airline to raise funds.

The airline has accumulated debt exceeding Rs. 7400 Crore (approx $1.58 billion) and reported a lower net loss (down 23%) of Rs.1,647.22 crore ($350.5 million) for the fiscal ended March. There is a significant erosion of the net worth of the carrier.

The airline is not alone in its financial woes. Fellow full-service carriers Jet Airways had debt of Rs. 13,759.50 crore ($2.93 billion) as of 31 March. National carrier Air India’s debt exposure was Rs. 17,000 crore ($3.62 billion) in May.

Industry sources feel that investors are more comfortable placing their funds with either Jet Airways or low fare carrier IndiGo whose initial public offering is expected within the next 12 months. However, with the government of India prohibiting foreign carriers from owning any stake in an Indian airline, it will be difficult for Kingfisher airlines to raise external commercial borrowing without a significant dilution of promoter equity. Said one source

Despite efforts, Kingfisher still does not enjoy a reputation of a lean and mean airline. If the airline does manage to raise the funds, Dr. Mallya’s share will fall well below 40%; and that is a very uncomfortable position for a promoter to be in.

In May, while the Economic Times was reporting IDBI bank recalling its loans from Kingfisher Airlines, the carrier had approached its lender the State Bank of India to re-structure its debt outside the corporate debt restructuring cell. As per banking guidelines a debt re-structuring within the cell implies the loan is considered bad, and this would all but erase any hopes of the airline to raise additional debt.

In June, the State Bank of India, approached the nation’s central bank, the Reserve Bank of India (RBI) with a special dispensation request to restructure the over $10 billion debt of Indian carriers after the RBI refused the bank’s request to advance a loan of Rs. 2,000 Crore to Kingfisher Airlines. In July, the central bank instructed 13 of the nation’s largest banks to form a common policy and consortia for debt restructuring rather than provide on- time relief to individual companies.

The airline’s parent, the UB Group, has been busy selling non-core assets and business to raise funds and pare down overall debt. The lack of funds injection by the group till now, gave rise to doubts on how much additional airline burden were the shareholders of UB Group willing to bear. The move by United Breweries (Holdings) of converting Rs. 650 crores provided as loans to the airline, appears to be converting loans, that may never return, in to equity which will at least provide some buttress when external lenders demand a share of the airline.

All is not lost though. The airline has reported improved financial results for the quarter ended June 30. In its investor presentation, the airline is showing the benefits of its aggressive cost cutting. However, we do not share the airline’s optimism on the benefits it will gain by its early induction in to the oneworld alliance. The alliance will surely squeeze far more concessions out of a financially weaker Kingfisher than it will concede in benefits.

While we hope we are wrong, for now we cannot shake off the feeling that this release appears to be just another attempt by the airline to ease market concerns on its precarious financial condition.

About Devesh Agarwal

A electronics and automotive product management, marketing and branding expert, he was awarded a silver medal at the Lockheed Martin innovation competition 2010. He is ranked 6th on Mashable's list of aviation pros on Twitter and in addition to Bangalore Aviation, he has contributed to leading publications like Aviation Week, Conde Nast Traveller India, The Economic Times, and The Mint (a Wall Street Journal content partner). He remains a frequent flier and shares the good, the bad, and the ugly about the Indian aviation industry without fear or favour.

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