Both Go First bankruptcy laws need a rescue
In the seven years that it has been around, Indian Prime Minister Narendra Modi’s signature bankruptcy reform has failed to live up to its billing.
The 2016 insolvency law was crafted when the country was just starting to tackle what would eventually rank among the worst piles of bad loans anywhere in the world: a $200 billion-plus menace. With banks garnering bumper profits in the post-pandemic high interest-rate environment, that baggage is now much lighter, the urgency to deal with it lower.
In a country where savings are in short supply, the priority was always to prevent productive capital from going to waste in unviable projects. Some high-profile resolutions of defaulted steel-plant loans raised creditors’ hopes, but rampant gaming of the legal process by vested interests is dashing them.
But rescuing Go First could be seen as bailing out the billionaire Nusli Wadia by inflicting losses on SMBC Aviation Capital, ACG Aircraft Leasing IrelLtd., other aircraft lessors. SMBC, which claims to have ended its lease before Go First’s filing, wants to take its jets away. The bankruptcy protection, the lessors have alleged, is a “fraudulent exercise.” On Monday, the appellate authority rejected their challenge: They need to approach the tribunal to repossess the planes with expired leases, or go to the apex court.
It’s a complicated bankruptcy. About half of Go First’s Airbus fleet has been incapacitated by failures of Raytheon Technologies Corp.’s Pratt & Whitney engines. The airline has claimed 74 billion rupees ($894 million) in compensation. A Singapore-based arbitration panel has asked Pratt & Whitney to “immediately begin making reasonable efforts” to locate suitable spares. The engine-maker has said that it will honor the award. But since it hasn’t supplied the first batch of 10 engines that the tribunal asked it to try to deliver by April 27, Go First filed for bankruptcy. Or that’s the Indian company’s version of events, according to its May 2 filing.
But those nuances are irrelevant for Go First creditors: Regardless of whether the airline was incompetent, undercapitalized or unlucky, its shareholders must pay a price before the lenders lessors are asked to make sacrifices.
That’s where India has been a disappointment. In only 6% of instances, debtors trigger bankruptcies. And the recovery rate for creditors in such cases that ultimately do get resolved is just 18%. Lenders are far more comfortable when they themselves drag firms to the insolvency tribunal. Although still low by global standards, the recovery rate in resolutions initiated by financial creditors is almost twice at high at 34%, according to India Ratings & Research, a unit of Fitch Group. Two years ago, this figure was 45%.
What will be the fate of Go First? Air travel has come back as suddenly as it was halted by Covid-19, Pratt & Whitney has a queue of customers to service. But assuming that the engine-maker would eventually get around to delivering 10 spares a month to Go First until December, as it has been directed to do by the Singapore arbitrator, this airline can fly again.
Go First has so far been current with repayments to banks, has only recently defaulted to lessors operational creditors. Had any of its debt been nonperforming for a year before the resolution plan kicked in, the Wadia Group would have been ruled out as a prospective bidder.
Leaving planes with a borrower that isn’t selling flight tickets isn’t ideal. It will jack up leasing rates even for those that are. Still, the tribunal’s intervention may be worth it. Consumers will pay a lot more if InterGlobe Aviation Ltd.’s Indigo the three Tata airlines end up as the only viable options for domestic air travel. After all, Go First isn’t the only one in trouble. SpiceJet Ltd., a carrier with a similar market share, has seen its stock lose half its value over the past year. The lessor Aircastle (Ireland) Ltd. is trying to push it into insolvency. That case will be heard May 25.
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