What's at stake for Vijay Mallya if Kingfisher fails?

 If liquor baron Vijay Mallya’s Kingfisher Airlines fails, lenders, to whom he owes $1.4 billion, may end up with a small stake in his spirits business, a modest office building, the carrier’s brand, and not a lot else.

A $16 million beachfront villa in Goa is owned by his UB Holdings Ltd (UBHL) and pledged as collateral to the State Bank of India (SBI), Kingfisher’s lead bank. But Mallya’s UB Group wants to swap the villa for another asset and says it has the right to do so. SBI is resisting.

Through interviews with bankers, lawyers and others in the financial industry, as well as information provided by the company and publicly available data, Reuters has pieced together what parts of Mallya’s empire are at risk if Kingfisher falls.

The airline was launched seven years ago by Mallya. While Kingfisher has never made a profit, it grew quickly to become India’s No 2 airline by domestic market share. It has since been knocked back to sixth, crippled by high debt and fierce competition.

Banks have guarantees of more than $1.2 billion from Mallya and his holding company, but collecting on them could prove difficult, and most of Mallya’s lenders, mainly state banks, would pursue that only as a last resort, sources said. No shares or other assets were directly pledged to banks against specific loans, according to Kingfisher. “There is no security to fall back upon,” said Sharad Bhatia, CEO of Phoenix Asset Reconstruction Co, a distressed debt investor. “Ultimately, banks will have to take a haircut,” he said.

Mallya’s UB Group includes Kingfisher, United Breweries, United Spirits Ltd and UB Holdings. Kingfisher’s woes have prompted speculation that British rival Diageo will make a play for United Spirits while Heineken goes after United Breweries.

United Breweries, Mallya’s crown jewel, does not have direct exposure to the airline or its creditors.

If Mallya were forced to sell some of his shares in the maker of Kingfisher beer, he could remain in the controlling shareholder group alongside Heineken, which has an equal stake, given the value he brings in a heavily regulated Indian alcohol industry.

United Spirits (USL), the other big listed company in Mallya’s stable, could also be hard for Kingfisher’s creditors to prise away against his will. Of Mallya’s 28 per cent of United Spirits, part of the 18 per cent held by holding company UBHL is pledged to lenders that funded its $1.2 billion 2007 acquisition of Scottish spirits maker Whyte and Mackay. The UB Group says it does not see a risk to Mallya's empire. “Since there are no shares pledged except 4 per cent of USL there is no risk of Vijay Mallya losing control over any listed company,” Prakash Mirpuri, Group spokesman, told Reuters.

The central piece

Banks are putting pressure on Mallya by moving to sell the Bombay House office building near Mumbai’s airport, worth roughly $9 million, and the villa. The Kingfisher Airlines brand was valued at Rs 41 billion in 2010 and is now worth Rs 25 billion, one lender said.

It is worth less to anyone other than Mallya, 57, who named the carrier after his flagship beer. “Selling off a brand, valuing it, is not an exercise that has happened before so we want to start with something that we understand first,” said a senior executive with one of Kingfisher’s lenders. “We have already started the process of liquidating the securities, the tangible ones — Goa villa and Bombay House. That will begin to hurt Mallya,” he said.

UBHL has guarantees of more than Rs 67 billion to banks and about Rs 22 billion to aircraft lessors on behalf of Kingfisher, according to a note by UBHL’s auditors in May, but the true value of those guarantees is difficult to ascertain. Unlike collateral, guarantees are not tied to specific assets. Mallya, who also owns a cricket franchise and last year sold a 42.5 per cent stake in his Formula One racing team to India’s Sahara group, has given a $50 million personal guarantee.

Until February, Kingfisher was a subsidiary of UBHL, a holding company controlled by Mallya and described as “the central piece that holds it all together” on the cover of its annual report for the financial year that ended in March 2011. The airline stopped being a subsidiary when part of Kingfisher's debt was converted into shares.