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MUMBAI, India – The board of Kingfisher Airlines will on Monday consider a proposal to cut debt by more than half by selling property, converting loans from its parent company into equity, and changin

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MUMBAI, India – The board of Kingfisher Airlines will on Monday consider a proposal to cut debt by more than half by selling property, converting loans from its parent company into equity, and changing the terms under which it leases aircraft.

The management of the airline, which has cancelled 200 flights in the past week, leading to fears it is close to bankruptcy, says its plan will result in debt coming down from Rs 6,500 crore to Rs 3,000 crore.

The debt-reduction plans to be placed before the board were spelt out in a presentation, which has been reviewed by this paper, to potential financial investors on November 6.

The management is likely to propose a preferential issue of equity to the promoters and other investors, meeting a key demand of banks that are insisting Vijay Mallya, the flamboyant tycoon who owns the airline, infuse equity into the troubled carrier.

Kingfisher is promoted by Mallya’s UB Group, which owns United Spirits, India’s biggest liquor company. The UB Group will also convert Rs 675 crore of debt into equity as part of the plan to pare debt.

The preferential issue of equity, if approved, will replace a rights issue of Rs 2,000 crore approved by the board in August. Once these plans are approved, Kingfisher will approach banks for up to Rs 500 crore of working capital to buy fuel and pay salaries, according to people familiar with the matter. Kingfisher’s lenders have made it clear that the airline would have to come up with acredible business plan.

“Kingfisher is a valued company, but an airline would need fuel, fleet and finance to run the show. Kingfisher should tell us how it plans to streamline its daily requirements,” Pratip Chaudhuri, chairman, SBI, said in Kolkata.

SBI is the lead lender to Kingfisher among the consortium of 13 banks. Chaudhuri said banks have asked the airline’s owners to bring Rs 800 crore as equity. The company has said Rs 400 crore has been arranged, but Chaudhuri said he wanted to “see the money”, news agency PTI reported. He said banks will meet KFA’s management on Tuesday.

Over the weekend, reports that the government might move to bail out Kingfisher has met with strong opposition from politicians and sections of industry. “If it’s a free market economy, those who die must die,” said Bajaj Auto Chairman Rahul Bajaj. The principal opposition party, the BJP, and the CPM have strongly opposed government help to Kingfisher.

Over the next two years, Kingfisher plans to raise close to Rs 900 crore by selling Kingfisher House, the airline’s headquarters near the Mumbai domestic airport, and other real estate, and Rs 700 crore more by changing the leases on its aircraft from financial to operating.

In case of a financial lease, the airline has to deposit money with the aircraft manufacturer, which can be up to 15% of the total value of the aircraft. Converting it into an operating lease would mean the deposit is paid by the leasing company, which in turn is paid lease rental by the airline.

Sanjay Aggarwal, Kingfisher Airlines CEO, however, refused to comment on the additional working capital but confirmed that the airline was planning to raise funds by changing the nature of lease agreements and selling real estate. “All this exercise is going to reduce our interest costs that are pinching us a lot right now and reduce debt levels to reasonable limit,” he said.

But industry insiders doubted if a change in the nature of the lease would raise the kind of money that KFA seemed to be expecting. Further, they say, the Mallya-owned airline’s relationship with leasing companies is less than stellar as it has repeatedly defaulted on lease rental payments for some of its aircraft.

“It needs to be seen how much value can be unlocked from sale of real estate assets as the realty sector itself is going through a challenging phase. With the troubles the company has with leasing firms, it will also be interesting to see if they are agreeable to bailing Kingfisher out.

But if they are indeed able to half their debt, as they are planning to do so, it will help the company a lot as what is hurting Kingfisher’s profitability is the high interest outflows,” said a research analyst with a leading brokerage firm not wanting to be identified.

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