UPDATE 2-India's Kingfisher in funding talks with Hong Kong's Lowy
* Spokesman declines comment on form of any investment
* Investment may total $280 mln - paper
* Shares jump 4.1 pct, later close up 1.4 pct (Adds analyst, SBI chairman, ATR order cancellation, stock close)
NEW DELHI/MUMBAI, Jan 19 (Reuters) - India's Kingfisher Airlines is in talks with Hong Kong-based distressed debt firm SC Lowy Financial for a possible investment, a sign the cash-strapped carrier may be running out of more attractive traditional funding options.
Kingfisher, controlled by liquor baron Vijay Mallya, has failed in long-running efforts to bring in fresh equity. Its banks are stuck with a quarter of Kingfisher's shares after a debt recast and lead lender, State Bank of India, refuses to lend more in the absence of an equity injection.
"We are in discussion with SC Lowy and others. We cannot comment further at this time," a spokesman for Kingfisher said on Thursday, declining to say whether any investment would be in the form of debt or equity.
The Economic Times reported earlier that Lowy may invest about $280 million in Kingfisher and a deal may happen by the end of this month. A spokesman for SC Lowy declined to comment on the report.
An aviation analyst in India said any investment was more likely to be in equity as Kingfisher, which has had trouble paying creditors and staff, does not have the cash-flow to service more debt.
"They have no bargaining power at all. I'm sure they must be accepting whatever valuation they might be getting," said the analyst, who declined to be identified because he is not permitted to talk about individual companies.
"It will have to come as a package, and the assisting lenders have to agree. I doubt if there's anything they can put up as collateral."
Indian lenders tend to be reluctant to sell or write-off loans, preferring instead to extend their duration or accept lower interest payments.
Shares in Kingfisher, which has never made a profit, have dropped 61 percent since the beginning of last year, shrinking the airline's market value to around $250 million.
Turboprop maker ATR, a joint venture of EADS and Finmeccanica, on Wednesday cancelled 38 plane orders by Kingfisher because the airline hadn't paid for the planes, which were part of a larger order placed around six years ago.
Mallya told the Financial Times in mid-November that Kingfisher, which was India's second-largest airline until it began slashing its flight schedule late last year, was close to securing a $250 million equity injection.
No deal has yet been forthcoming.
State Bank of India, Kingfisher's biggest lender, considers its loans to the airline to be non-performing.
"Airlines, including Kingfisher, have to get equity. So, whosoever brings in equity or capital, interest free capital is welcome," SBI Chairman Pratip Chaudhuri told reporters in New Delhi on Thursday.
"Fresh money (SBI loan) is not in consideration. We're working with them because (the) account is in default. We're working with them to cure that default.
"We still have faith in the company. With more favourable conditions and a good business model they should be able to come out of their current troubles," Chaudhuri said.
SC Lowy, founded by two ex-Deutsche Bank veterans in 2009, is a trading and investment firm focused on investing in illiquid assets. CEO Michel Lowy and Chief Investment Officer Soo Cheon Lee led Deutsche's Asian distressed products group until March 2009, when they broke away to found the company.
"I don't think it will be a distressed sale at the present moment," said Kapil Kaul, regional head of the Centre for Asia Pacific Aviation, a consulting firm.
"I would think the promoters are looking at raising capital," he said, referring to the company's controlling shareholders. "It could be a combination of promoter funding and new investment coming in."
Kingfisher shares rose more than 4 percent to an 8-week high, before paring some of those gains to close up 1.4 percent.
In a move that could help airlines access fresh funding, India's Aviation Ministry said this week it would recommend the government allow foreign airlines to buy stakes of up to 49 percent in Indian carriers, which are reeling with debts of around $20 billion.
Foreign airlines are currently barred from buying into Indian carriers, though foreign investors can hold a cumulative 49 percent.
All but one of India's six main airlines is loss-making, with state-run Air India on government life-support.
The nation's airlines are expected to lose up to $3 billion in the year to end-March, hit by high fuel prices and stiff competition even as air traffic is growing at nearly 20 percent a year. (Additional reporting by Stephen Aldred in HONG KONG and Sanjeev Choudhary in NEW DELHI; Editing by Tony Munroe and Ian Geoghegan)
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