Plan at India’s SpiceJet to hive off cargo arm criticised

Banks that have extended loans to cash-strapped SpiceJet (SG, Delhi Int’l) have warned the carrier against any moves to separate SpiceXpress, its cargo arm, by placing it in a wholly-owned subsidiary without consulting them first, the Hindu Business Line has reported. On February 10, SpiceJet released a list of resolutions that its shareholders had agreed to at an annual general meeting on December 24, which it placed on its website together with its unaudited financial results for the third quarter ended December 31. Among other resolutions, the shareholders “authorised the board to transfer by way of sale or otherwise the cargo business of the company to its wholly-owned subsidiary, namely SpiceXpress and Logistics Private Limited.” This would be done ahead of “plans to add more cargo aircraft to scale up SpiceXpress’s existing capacity and transform it into a fullscale freighter cargo service.” SpiceJet has taken multiple loans from institutions such as City Union Bank, Export Development Bank, Allahabad Bank, IDFC First, ICICI Bank, and YES Bank, but an unnamed source close to the lenders told Business Line that they had expressed concerns. “The loan sanction letter has a special covenants clause, under which the permission of the lenders is mandatory before taking such decisions,” the source said. The clause in documents outlining the conditions for SpiceJet’s loans states: “The borrower shall not without prior written permission of the bank undertake or permit any merger, de-merger, consolidation, reorganisation dissolution or reconstitution scheme of agreement of compromise with its creditors or shareholders, or effect any scheme of amalgamation or reconstitution including the creation of any subsidiary or permit any company to become its subsidiary.” “The clause protects the banks,” explained JN Gupta, managing director of the Mumbai-based non-profit advisory firm Stakeholder Empowerment Services. “If the banks’ permission has not been taken, a company cannot move ahead with a resolution of any kind. These are all independent conditions. Even if the shareholders give their permission, the decision cannot be taken forward if the banks do not approve.” An aviation industry source told the newspaper that if either passenger and freight – as the two elements of the airline business – is removed, then “the claim of the lenders moves away from that cash flow, which is a loss for the banks. You are removing one of the important cash segments of the company, and it will have a bearing on the cash flow.” SpiceJet was not immediately available for comment.