Kingfisher Airlines creates an air pocket for banks

Banks' exposure to the aviation sector is unsafe, as the companies in the sector are highly leveraged, face a high interest burden and also the potential rise in fuel costs, which eats up these firms' profitability. A total of approximately 63500 cr of debt is seen in the airline companies like Kingfisher, Air India, Spice and Jet Airways. Kingfisher Airlines has a huge debt of Rs 7000 cr, of which approximately Rs 6200 cr has been issued by the Indian banks.

For the last 7 years, Kingfisher Airlines has been reporting losses continuously. For FY11, it reported a loss of Rs 1027 cr on the back of huge interest expenses, which stood at Rs 2340 cr. Banks are worried as their exposure to the company will result in the restructuring of debt and additional provisioning, which will affect the banks' profitability. SBI has the highest exposure of Rs 1410 cr in Kingfisher Airlines.

The following table shows the exposure various banks have to Kingfisher Airlines:

Bank	Rs (Cr)
State Bank of India	1410
IDBI	719
Punjab National Bank	702
Bank of India	552
Bank of Baroda	532
ICICI Bank	430
United Bank	395
Central Bank	360
Corporation Bank	305
UCO Bank	287
State Bank of Mysore	139
Indian Overseas Bank	122
Federal Bank	100
Oriental Bank of Commerce	56
Punjab and Sind Bank	51
Axis Bank	46
IndusInd Bank	6
Total	6212

Kingfisher Airlines had asked for government help to meet the financial challenges resulting from rising cost of ATF and the debt burden. It has also proposed that the government should allow FDI investment in the aviation sector.

The banks will have to restructure some of the company's loans, and would be required to provide more provisioning, which will be reflected in  the Q3 FY12 numbers. In last 3 trading sessions, the banking stocks took the most beating. SBI is down 7% to Rs 1729.90, IDBI Bank is down 8% to Rs 101.95 and ICICI Bank is down 8.23% to Rs 790.75.

Earlier, the banks had restructured some of the loans into Compulsorily Convertible Preference Shares (which were further converted to equity at Rs 64) and Cumulative Redeemable Preference Shares. Banks now own 23.39% of the shares, and are affected by Mark-to-Market loss. We feel that they will not lend any more funds to Kingfisher Airlines now.

SBI has asked Kingfisher to raise some capital before any debt restructuring is done. The banks will further control the cash flows of Kingfisher Airlines. The revenues of the airline will flow into one bank account, which will be tracked to avoid any default. This decision was taken very quickly, after the airline cancelled 200 flights and asked the government for help.

Further, we, at DSIJ, feel that to meet its working capital requirement, Kingfisher Airlines will raise funds through its promoter in the form of unsecured loans. Profits from the airline company are not visible in the near term due to high ATF prices and the interest burden, as mentioned earlier.