What will happen to equity shareholders of jet
airways?
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Article published as on Monday, 26th October, 2020
at 7:00 a.m.
Recent news of Kalrock capital and Murari lal jalan
bidding to takeover jet airways has led to surge in share price of jet airways.
And it is continuously locked in upper circuits.
Now the
question is what will equity shareholders get?
Let’s understand the current situation
Jet airways last flight flown on 17th April
2019
(Operation
suspended due to cash crunch)
Jet airways is admitted into insolvency and
bankruptcy court on 20th June 2019 (after lenders referred it to IBC)
It’s over a year now and finally a promising bid
has come in from Kalrock capital but still lenders are staring at over 90%
haircut, in response to this they say that ‘something is better than nothing’
The committee of creditors (COC) comprises of financial
creditors (lenders mainly). And for insolvency the voting power is in the hand
of COC and not the shareholders.
COC has approved the bid and takeover and are
expected to take 90% haircut on their loans
Now after the voting and approval by COC the
permission from NCLT and other stakeholders (like government) would be needed
and after that Jet airways will be able to restart its operations
Now coming
to the point, what about equity shareholder?
No they won’t be asked to vote like any normal resolution
as this company is not a normal going concern but the one admitted into
insolvency.
In the case of insolvency it completely upon the
new investor how they want to restructure the shareholding pattern
What will
happen to the share price and shareholders?
Answer will
depend upon the details of the deal.
Shareholder could be in for a treat just like in
the revival case Ruchi soya or of Alok industries (where lenders took
approx 80% haircut and the more risky equity shareholder earned multiple times
returns on their investment.
(Sometimes I feel these situations are like in the story
of अंधेर नगरी चौपट्ट राजा टके सेर à¤ाजी टके सेर खाजा
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)
Or shareholders could also face a rude shock just
like the case of essar steel when the arcelormittal group had taken over, ALL
the existing equity was written off.
Technically as
per the waterfall model if lenders are not able to recover full amount
then the value of equity shall be zero. By this method the value of jet airways
shares is zero or worthless.
But we have seen many surprising cases just like
ruchi soya, alok industries and of the AT1 bonds of Yes bank where debt was
written off but equity still had value.
So whether there is value in shares of jet airways
depends upon the detail of deal and how the kalrock capital and jalan decides
to treat exisitng shareholders.
Jet airways shares are currently locked in upper
circuit on expectations that the shares won’t be written off and the airlines
will once again be a thriving one!
But on the other hand investors need to be aware
mentally that technically if lenders are taking 90% haircut, then equity which
is more risky is to be written off and there is possibility of this happening.
Conclusion: in my personal opinion I would advise
people to not get lured into the stock based on several news of takeover and
revival of the company
(Why is the stock still listed? Such companies
should have been suspended by the exchanges, months earlier 😞)
And for those already holding share should be aware
of the risk that total write off can happen.
UPDATE as on: 22/10/20
Article in economic times pointed (link here) out that the new investors plan to takeover 90% of shareholding and give the rest to lender bank like SBI, Yes bank, etc. and the existing public shareholders are likely to receive no benefits.
Scrip name: Jet airways share price: 51.15 rupees (23/10/20)
Scrip code:
532617 market
cap: 581.05 crore rupees
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