MUMBAI:
Debt-laden national carrier Air India is set to hit the market with its Rs 7,400-crore bond issue
soon, as the much delayed nod from the finance
ministry to back the fund-raising exercise with unconditional
government guarantee is expected within a fortnight, two sources close to the
development told ET.
Air India is reeling under a huge debt burden of over Rs 43,000 crore, a mix of long-term debt and working capital loans, and is, therefore, banking heavily on this bond sale backed by sovereign guarantees to ease the interest cost on the expensive working capital loans. The finance ministry had put these plans on the dock when it said that Air India will get only 'conditional guarantees' that too based on achievement of specified parameters.
"An unconditional guarantee is a serious issue and the finance ministry will take its time. But as we understand the finance ministry is likely to come around on the issue as the Cabinet has already cleared it," Rohit Nandan, Air India chairman and managing director, told ET.
For the national airline to get going with the bond sale also becomes important as from October 1 some of the loan recoveries will start which were minimal till this period as the airline was under the financial restructuring plan (FRP).
"As far as milestones are concerned there is already an oversight committee that is reviewing operational performance every month and on most of the parameters for the past four to five months we are doing much better than what has been mandated," Nandan added.
In the coming months, Air India will pay Rs 100 crore every month as interest cost. "We were under the FRP and that is the reason we were getting away with just Rs 25-30 crore payments per month but now the recoveries will start," Nandan said.
The minister of civil aviation, Ajit Singh, who met the finance minister recently to resolve the sticky issue, said that unconditional guarantees have to come by as the government was unanimous on Air India's financial restructuring and unconditional guarantees for bonds was an important part of the plan.
"It was a decision that has been taken by the Group of Ministers and the government has decided that the NCD will be backed by unconditional guarantees. Now the government has to ensure that the issue is subscribed. How it is done and what wordings are used is not material. The whole turnaround plan rests on the financial restructuring and that has to be done as it was a government decision," Ajit Singh told ET.
In April this year, 17 lenders to the national carrier Air India approved a financial restructuring plan for the airline which envisaged equity infusion of about Rs 23,000 crore into the airline over the next 10 years by the government as a stakeholder. It also said that there would be restructuring of Rs 22,000 crore of its high-cost working capital debt. Of this, the banks agreed for a conversion of Rs 10,500 crore to long-term loans and the rest was to be returned to the banks through the bond sale.
Air India has, in the meantime, issued fresh dates for inviting the bids extending the earlier date to October 12. "The airline is expecting the government of India guarantees and that could happen within a week. We will be able to close the bids within two weeks of receipt of guarantee," said an Air India top official.
Air India, according to Nandan, is also looking at other options for low-cost loans like ECBs. "Some people have responded and we are in talks with them for getting in some part of the money through this route. Even if it is one fourth of what is to come by through bond sales, we would be fine," Nandan said.
More importantly a senior finance ministry official said that the government has no choice but to offer unconditional sovereign guarantee on Air India bonds.
Air India is reeling under a huge debt burden of over Rs 43,000 crore, a mix of long-term debt and working capital loans, and is, therefore, banking heavily on this bond sale backed by sovereign guarantees to ease the interest cost on the expensive working capital loans. The finance ministry had put these plans on the dock when it said that Air India will get only 'conditional guarantees' that too based on achievement of specified parameters.
"An unconditional guarantee is a serious issue and the finance ministry will take its time. But as we understand the finance ministry is likely to come around on the issue as the Cabinet has already cleared it," Rohit Nandan, Air India chairman and managing director, told ET.
For the national airline to get going with the bond sale also becomes important as from October 1 some of the loan recoveries will start which were minimal till this period as the airline was under the financial restructuring plan (FRP).
"As far as milestones are concerned there is already an oversight committee that is reviewing operational performance every month and on most of the parameters for the past four to five months we are doing much better than what has been mandated," Nandan added.
In the coming months, Air India will pay Rs 100 crore every month as interest cost. "We were under the FRP and that is the reason we were getting away with just Rs 25-30 crore payments per month but now the recoveries will start," Nandan said.
The minister of civil aviation, Ajit Singh, who met the finance minister recently to resolve the sticky issue, said that unconditional guarantees have to come by as the government was unanimous on Air India's financial restructuring and unconditional guarantees for bonds was an important part of the plan.
"It was a decision that has been taken by the Group of Ministers and the government has decided that the NCD will be backed by unconditional guarantees. Now the government has to ensure that the issue is subscribed. How it is done and what wordings are used is not material. The whole turnaround plan rests on the financial restructuring and that has to be done as it was a government decision," Ajit Singh told ET.
In April this year, 17 lenders to the national carrier Air India approved a financial restructuring plan for the airline which envisaged equity infusion of about Rs 23,000 crore into the airline over the next 10 years by the government as a stakeholder. It also said that there would be restructuring of Rs 22,000 crore of its high-cost working capital debt. Of this, the banks agreed for a conversion of Rs 10,500 crore to long-term loans and the rest was to be returned to the banks through the bond sale.
Air India has, in the meantime, issued fresh dates for inviting the bids extending the earlier date to October 12. "The airline is expecting the government of India guarantees and that could happen within a week. We will be able to close the bids within two weeks of receipt of guarantee," said an Air India top official.
Air India, according to Nandan, is also looking at other options for low-cost loans like ECBs. "Some people have responded and we are in talks with them for getting in some part of the money through this route. Even if it is one fourth of what is to come by through bond sales, we would be fine," Nandan said.
More importantly a senior finance ministry official said that the government has no choice but to offer unconditional sovereign guarantee on Air India bonds.
"If there
is no guarantee, the rating of the bonds will go down. This will not only
impact its pricing but also several investors such as insurance firms will not be able to subscribe," he said requesting
anonymity.
The official added that if there is no guarantee the whole purpose of issuing bonds will be a waste. "Why will anybody buy a junk paper," he argued. The current regulations restrict insurance companies to invest only in the highest rated 'AAA' or 'AA' credit rated paper. Of this, a minimum of 75% of debt instruments should have 'AAA' rating. From an investor perspective market conditions seem to be the overriding factor for such a subscription.
"It all depends on the market conditions at that point in time. Since the bonds carry unconditional guarantee, there should be good interest from the investors. It will depend on the interest the big institutional investors show, since the size of the issue is huge. Merchant bankers are waiting for the expression of interest from the issue," said Shashikant Rathi, senior vice president, head, debt capital market, Axis BankBSE 0.61 %.
The official added that if there is no guarantee the whole purpose of issuing bonds will be a waste. "Why will anybody buy a junk paper," he argued. The current regulations restrict insurance companies to invest only in the highest rated 'AAA' or 'AA' credit rated paper. Of this, a minimum of 75% of debt instruments should have 'AAA' rating. From an investor perspective market conditions seem to be the overriding factor for such a subscription.
"It all depends on the market conditions at that point in time. Since the bonds carry unconditional guarantee, there should be good interest from the investors. It will depend on the interest the big institutional investors show, since the size of the issue is huge. Merchant bankers are waiting for the expression of interest from the issue," said Shashikant Rathi, senior vice president, head, debt capital market, Axis BankBSE 0.61 %.
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