Airline companies will not be able to take much benefit of the recommendations of the Resolution Framework for Covid-19 related stress, industry executives and experts said.
The very high parameters fixed by the panel will be a challenge for airlines to take benefit of this.
The KV Kamath panel has suggested that lending institutions mandatorily keep 5 key ratios in mind while framing resolution plans.
The lenders will mandatorily consider total outstanding liabilities/adjusted tangible networth, total debt/EBITDA, current ratio, debt service coverage ratio, and average debt service coverage ratio.
For any airline to be eligible for restructuring, the current ratio has to be equal or higher than 0.4 and the debt to EBITDA ratio has to be equal to or less than 5.50.
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“Ideally if an airline is working with a positive current ratio - it would be a bad signal of its performance. So the current ratio of a typical airline in India will never exceed 0.2 to 0.3. Hence 0.4 current ratio is relatively high to ask,” said the chief financial officer of a private airline.
Similarly, a second executive pointed out that the net worth of most of the airlines, other than IndiGo, had eroded completely. “Asking for a debt to EBITDA ratio of 5.50 doesn’t make any sense,” the executive said.
The panel defended the high parameters for the sector saying that airlines use the cash and carry model for revenue purposes, thereby creating almost zero debtors and higher current liabilities in the form of advance received from customers. These advances are approximately 2 months of yearly sales of the airline industries.
“The theory sounds solid. But in a condition where airlines have to give heavy discounts and then too, not be sure of getting flyers back, the cash and carry revenue model theory doesn’t work. Airlines are selling tickets at discounted prices while fixed costs like airport charges, lease rentals, jet fuel cost remain high, thereby negating this theory. The panel should have been more practical,” the CFO quoted above said.
Similarly, getting working capital loans will become difficult as there is no certainty when the passenger flow will pick up.
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"Bankers have not been in favour of lending to airlines as they aren't sure if airlines can service debt even if repayment periods are stretched by two years," an executive with a public sector bank said.
The main reason behind this are the the multiple bankruptcy cases of airlines which have made banks uneasy about the sector. "Kingfisher and Jet Airways went bankrupt leaving a hole of more than Rs 15,000 crore in banks' books. Naturally everyone is doubly careful while lending or restructuring loan books of airlines," he added.
Experts said that it would be difficult for airlines to get any restructuring of existing loan facilities or get fresh loans unless promoters infused cash. “The promoter has to show the intent and infuse cash in order to increase confidence of lenders,” said Kapil Kaul, CEO- South Asia at aviation consultancy firm CAPA.
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September 07, 2020 at 11:29PM
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Difficult to avail loan restructuring under Kamath panel: Airline execs - Business Standard
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