Kingfisher loan recall will be messy affair: BMR Advisors

A consortium of lenders led by State Bank of India (SBI) has decided to recall their loans to the troubled Kingfisher Airlines and put an end to the two-year long story. Seventeen banks including SBI, Bank of India, IDBI,Punjab National Bank and Bank of Baroda have exposures amounting to Rs 7000 crore to the airlines.

Though the banks are trying to process the personal guarantee collaterals, Kingfisher's present debt amounts to around Rs 13,000 crore which is much more than what it owes to the banks.  Also read: 4 banks to deal with Kingfisher recovery, to find law firm
Vivek Gupta, Partner at BMR Advisors clearly considers the entire situation to be messy. According to him, there will certainly be a hierarchy of demands once claims are made. In that case, statutory dues including employee provident fund, insurance, service tax and income tax will have to be cleared before satisfying the demands of banks, he explained. Moreover, he believes, it will not be easy for banks to realise the securities or guarantees available with them. Here is the edited transcript of the interview on CNBC-TV18. Q: Earlier today we had State Bank of India (SBI's) Deputy Managing Director telling us that they have collaterals in the form of pledge shares as well as personal and corporate guarantees. Will they really be able to realise all that or will employees and others have earlier claims or more clearer claims on the assets of Kingfisher?
A: This is clearly a messy situation. It is not a situation that Kingfisher Airlines lenders would have liked themselves to be in. In such a situation there is a hierarchy through which recoveries can happen. So in terms of hierarchy, I think the first charge always will go to statutory dues.
If there are any provident funds, if there are any employee insurances, if there are any taxes like service taxes, income taxes etc. which are unpaid, I think from a winding up perspective that will be the first demand to be satisfied. Post that the secured lenders, that is the banks will come in and their interest recoveries will also depend on the kind of contractual rights that they have in their documents.
I don’t think it is as simple as to say that against USD 1.5 billion of debt you have a certain set of securities. There would be various classes, potentially of lenders amongst the USD 2.5 billion number that you talk about and apart from the complexity of hierarchy, the other complexity is realising all of these securities in the Indian context is also not the easiest thing.
So from a banking standpoint, I do think that this is a messy situation which will not only be impacted by hierarchy of demands and the number of people who have those demands, but also by the fact that you cannot realise the security or monetise the security very easily. Security will be a mix of shares, real estate, personal guarantees, non-disposal undertakings, the aircrafts themselves and so on and so forth. Q: So logically, how much do you think the banks can actually realise if they had to liquidate the collateral because like you pointed out by invoking personal or even corporate guarantees, there may not be too much that banks can realise because according to some reports the airline has not even given too much in terms of corporate and personal guarantees as well?
A: I think it is really tough for anyone who does not have intimate knowledge of the contract to hazard a guess here in terms of what banks could or could not realise. That is why I also think the banks were waiting and clinging to the last hope.
Since October 2012 this airline has not been flying, but banks have not moved against them. There were talks, the government loosened up regulatory norms, there were talks of a foreign airline coming in and that also hasn't fructified. Now before March 31 I think the banks were forced to take action.
They perhaps were anticipating some sort of capital infusion by the promoters, from other group companies etc. and that also has not happened. So, I don’t know. I can't hazard a guess.
_PAGEBREAK_ Q: Suppose the banks have several crores of United Spirits (USL) shares as collateral or the holding company United Breweries' shares as collateral, is it at least possible that they can realise that or even for those shares there could be employee claims to be settled and that gets a claim over a clear collateral, which is marked for the bank?
A: Employee claims per se will not be taken up in precedence to this collateral. But all statutory dues will be. So to the extent employees can relate would be for example, in case of provident funds they will have priority over whatever any secured lender holds.
But, post payment of those taxes, after paying out what is called as workmen compensation which is given to employees below a certain salary level, they have to be paid out a certain salary etc. Once these payments are made, the secured lenders can start realising the value of their security for their own benefit. Q: Personal guarantees, in the Indian context what would they amount to? Surely promoters of the calibre of Vijay Mallya would have done adequate tax planning even in the best of times and now when they know that guarantees would be invoked, would they not have transferred a lot of their property to trusts or to other relatives, do personal guarantees bring much?
A: I think the real security that the banks hold here is the shares of the other companies. The shares of United Spirits, the shares of Mangalore Chemicals & Fertilizers etc can be considered real security. Whether any planning has been done or it hasn’t been done, is conjecture. Even if such planning was to be done, the real value or the real net worth of a person, when such large amounts are involved, lies in the listed value of the other stock.
Yes, you can do some planning to take out some real estate and so on and so forth. I don’t think that that will hugely influence the amounts that the banks would recover. I think the recovery stands on whatever real estate have been pledged. The recovery also stands on whatever shares have been pledged and how they can realise them.
But, my overall point is it is not going to be easy to realise the value of these securities and it is indeed a messy situation for the banks. Q: A hypothetical question then, when we spoke to State Bank of India (SBI) they indicated that the consortium will now appoint a legal consultant to actually devise a prudent way to do the loan recall. If you were the legal consultant appointed, then what would be the most prudent way to go about this whole mess?
A: One will have to study the entire contractual system. Right now, we are talking in a lot of conjecture in the sense that we don’t know exact facts. So once all the facts are known, there will be certain liabilities that will have to be paid out in precedence to my claim as a secured lender and subsequently, we will have to devise efficient ways and means to be able to realise the security.
That would be anyone's intent or that would be the consortium's intent now as it proceeds to recover these loans. Q: If the loan recall is implemented, do you think it could be the end of the road for the airline?
A: I would imagine so because unless someone comes in with a huge capital section, whatever is in the airline will now be subjected to enough trouble. I don't see how the government can then give out flying license and so on and so forth. So, it is clearly troubled times for Kingfisher.