The Curious Case of Vijay Mallya and his bailout.

And one more

scam!
It was the month of November and India was experiencing an unbelievably
hot winter. Gripping the country was the excitement of an India-West Indies
test series, and the fervour of the birth of a future eye candy. Then, from
nowhere, came this shocker of a news.
The airline of good times, owned by the king of good times, Kingfisher
Airlines, was..well, crashing, that too at terminal velocity. Turns out, they
couldnt pay their pilots, their stewardesses and even their janitors. Hell,
they couldnt even pay for their fuel. And no fuel meant no flying and no
flying meant, no money.
Tragic as it may be, the theory of capitalism and a dude called Darwin, says
that only the fittest survive. And going by that theory, if a private enterprise
cannot manage itself, it has to sink like the Titanic. Which was pretty much
the case with Kingfisher.
Which was when, Vijay Mallya asked the Indian Government to save his
airline.
Now, people asking for bailouts are fairly normal. Even Goldman Sachs asked
for one. But when you are a guy whose idea of a workday, is schmoozing
around with anorexic models, on the worlds largest yacht, asking for a
bailout somehow doesnt cut ice.
The inevitable arguments followed with Arnab Goswami taking the lead on
prime time TV and Suhel Seth vehemently playing the devils advocate, to
save his friend. When the noise refused to go down, the man himself came
on TV. Speaking Oxfordian English, he reassured us that his Kingfisher
Airlines is hale and hearty. Also he emphasised that, he was not Air India and
what he asked for was not a Bail Out. In fact he assured us that he as a
responsible industrialist will never ask the poor taxpayer for his hard-earned
money, to save his private airline. And some more mumbo jumbo.
Basically selling us a load of nonsense that weighed as much as a leased
Kingfisher airplane.
Because, saying Kingfisher airlines is in trouble is like saying Ra-One is just a
bad movie. Kingfisher is right now at a stage, where being in trouble would
have actually been a good thing. It is actually having an existential crisis.
Figure this out:
It has a total debt of Rs 7000 crores or Rs 7000,00,00,000, even after
about Rs 1400,00,00,000 was kind of written off last year.

 On top of this seriously large debt, the airline made an operational loss of
Rs 1027 crore or Rs 1027,00,00,000 over the last year. And the loss since its
inception in 2003, a small matter of Rs 5,690 crores or Rs 5690,00,00,000.
It owes a sum total of approximately Rs 890 crores to all its fuel suppliers.
The situation with the fuel is so bad that Indian Oil has put Kingfisher on a
Cash and Carry basis. This means, they have to pay Indian Oil for every drop
of fuel, before it actually goes into their planes and not afterwards, as is the
norm. BPCL and HPCL, the other two suppliers, have stopped supplying fuel
completely. BPCL has even filed a court case against Kingfisher Airlines for
recovery on unpaid dues of over Rs 250 crores.
It owes the Airports Authority of India, undisclosed landing charges. Their
cheque of Rs 151 crores to clear the dues, apparently bounced. And in a
harbinger of further trouble, both the Bangalore and the Hyderabad airports
have decided to ask Kingfisher for landing charges before they allow the KF
planes to land.
It has absolutely no assets that it can sell or mortgage. All its aircraft are
currently leased, speaking of which Kingfisher had to return its 5 ATR aircraft,
the mainstay of its short haul flights, to its lessors as it could not afford the
lease amount. With that, the sum total of aircraft returns since 2009 due to
non-payment of rent, increased to a total of 19. Also further aircraft recalls
by lessors were on the way due to rental defaults.
But how did it all come to this.
For anyone who says (Read, the media and the man) this was due to the
unfavourable combination of a hostile economic climate and high aviation
fuel prices, please punch him/her in their faces. That problem has been
there, for the last three or four years. And Kingfisher has been a loss-making
entity since the day Mallya announced its launch in 2003. So at a time, till as
late as 2005-2006, when all his competitors, including the much maligned,
Air India, were actually making profits, Kingfisher sustained continuous
losses.
And the man claims all is well and as an honest industrialist he will never
ask for tax payers money.
But why should he ask, when he has surreptitiously taken a lot of it anyway?
Add to the tax payers money, Mallya also set his eyes on the money of the
predominantly middle-class depositors who invested their savings in trusted
public sector banks. And drained some more out of the innocent
shareholders who invested in UB group .

This essentially translates to the money of a whole lot of bus drivers, school
teachers and well, pretty much anyone who has an account in SBI or any
bank that gave money to Mallya.
Flashback to 2010, Mr Mallya was, as usual, neck-deep in trouble. Banks
were circling around Kingfisher, like vultures asking for the money that it had
borrowed but could not or did not repay. Our man invited people from all the
banks, to sit and restructure/reduce/waive off his debt.
Unsurprisingly, the bankers obliged.
At the time of restructuring, Kingfishers total debt was Rs 8,414 crores. To
reduce that, banks decided to convert some of it to equity to give Mallya a
breather. After invoking some advanced mathematical calculations, the
bankers converted, approximately Rs 750 crores to equity. In lieu of the
waive off, the banks got a 23 percent stake in the airline. The whole
transaction was done, with each Kingfisher Airline share being valued at Rs
64.48.
In one line, the bankers said, 23 percent of KFA, at the above share price,
was about Rs 750 crores.
In addition to this, KFAs parent, UB group also took up some of its loans. In
total, Mallya got a 1,400 crore breather. At the end of it all, Mallya threw a
big party for the bankers, were the drinks were on the house.
However, there was one small problem.
Share price of Kingfisher Airlines that day was, Rs 39.90.
This meant that Mr Mallya was given an incredible premium of 61 percent
per share in his failing company. Why was it given, we dont know? It was
either because of his Rocky Balboa like business model, his influential
friends, or his mesmeristic powers inherited from Dr Frank Mesmer Himself.
My bet is, he had the last two.
Because, such a premium meant, Vijay Mallya straight up deprived the
banks, its innocent depositors and UB group shareholders of approximately
Rs 530 crores.
How is that even possible?
Well first, you have to understand the manner in which the debt recast was
done.

When the banks took up a 23 percent stake in KFA at the cost of Rs 750
crores, it was in the form of Compulsarily Convertible Preference Shares
(CCPS). In addition to that, Rs 553 crores of debt was converted to
Compulsarily Redeemable Preference Shares (CRPS), to be returned at a later
date.
For all those who think I am speaking Mongolian, here is the explanation
The CCPS part, Rs 750 crores, was an amount that was basically waived off
by the banks in return for KFA shares, shares which were valued at Rs 64.48.
And for this favour, the banks got banks got 116 million KFA shares, or as
you read, approximately 23 percent of the airline.
The Rs 553 crores CRPS, was an amount that banks told KFA to return on a
later date. But that amount would not be reflected in KFAs debt column.
Sounds like a Fair deal, right?
Not when you have given the aforementioned 61 percent premium per share.
The actual value of that Rs 116 million KFA shares, on the day the recast was
announced was not Rs 750 Crores as determined by the banks, but Rs 464
crores.
So, on the day the deal was signed, banks decided to literally hand over Rs
284 crores of depositors money to Vijay Mallya and his floundering airline.
While Vijay Mallya claimed he had reduced his debt, which in essence was
true, he had actually deprived the depositors and the banks of almost Rs 300
crores.
The banks, to their defence, will say that the Rs 39 price of a share,
considering Indias potential in aviation, was a minor blip and the price would
rise to its true value, which they determined as Rs 64, sooner rather than
later. And if it goes above Rs 64, banks can make a killing.
It has been almost a year since the deal was announced, and the highest
stock price of Kingfisher in that periodRs 47.75. Not once did it cross the
bank determined value. Not once.

As of today Kingfisher stock price has nosedived to Rs 26, rendering the

value of the Kingfisher stocks that the banks have, to approximately Rs 300
crores or so.
Which means, Vijay Mallya, as of 15 February 2012, has swallowed, at least
Rs 450 crores of depositors money from various banks.
But where do the UB group share holders come into this?
Well to mitigate the risk, the bankers asked KFAs parent company to take
the same deal they got and sink in money which was proportional to what
the banks were putting in. That translated to Rs 648 crores, for which UB
group were issued 100 million shares.
As of today, those shares are valued at, Rs 260 crores.
Which means as of 15 February 2012, UB group, thanks to Kingfisher, has a
loss of almost Rs 400 crores on its books.
Total loss, as of 15 February 2012, Rs 900 crores.
Add to the above the straight up loss of Rs 900 crores the banks also
reduced the interest rate of his left-over debt by 2.5 percent so that he could
repay, as and when his lordship is willing. Effectively translating to a further
loss of Rs. 150-180 crores per annum in interest income, over the term of the
loan.
And all this is depositor money, which translates to your money, my money
and the money of pretty much anyone you will meet on the street.
And Vijay Mallya says he has not taken and will never take tax-payers money.

If you think the debt recast was itself a little too much, Mallya was also given
additional term loans of Rs 1,000 crores, to keep his airline afloat. How he is
going to repay that, only God knows.
However the fundamental question is this: didnt the banks realise that this
is an almost insolvent if not a totally insolvent company they are dealing
with? The facts were on the table: here was a company that has not made a
profit since the day it was established. It has substantial unpaid bills in
almost every sphere of its operations. Its debt was rising every day. And the
global outlook on the aviation sector in general has been negative for the
last few years.
In other words, The Company is in trouble.
Infact the situation was so catastrophic, that KFAs own auditor, doubted the
airlines viability. In fact he even put that down in the annual report.

So how could the bankers not only give Kingfisher Airlines a breather in its
debts, but give it at an unheard of 60 percent premium guaranteed to cause
them huge losses in both short and long term? And add to that, give interest
reprieves and further loans as well.