Friday 9 November 2012

Bypass Act: Air India may sell most of its bond offer to LIC, EPFO


MUMBAI: Air India may bypass the market to sell the bulk of its Rs 7,400-crore bond issue with LIC and the retirement fund body EPFO in what will be the largest debt offering in recent times.
This could be intended to punish market participants who had not shown much interest to the issuance, fearing that the government would not back NCDs with a full and final guarantee.
"Or, it's also possible that the corporation does not want to attract any controversy over the pricing of the issue. It is being attractively priced and we hope that other investors have a chance," said a senior officer with a financial institution.
Investor interest in the NCD has gone up with the government now spelling out that there will be unconditional and irrevocable guarantee for the timely repayment of principal and interest.
The guarantee will remain in force even if AI does not meet its NCD obligations due to any winding up or similar proceedings initiated against the company.
Also, most investors feel that exit will be easy if two of the country's biggest debt investors - LIC and EPFO - are interested in the paper. "The initial response was somewhat cold since many nationalised banks have exposure to Air India and are unlikely to be interested to buy the paper in the secondary market.
Since the return offered is attractive, the government and as well as the corporation may have felt that let the earnings go to a state-run entities," said a broker. AI officials declined to comment on the matter.
The government has given a pricing band of 50-70 bps above the yield on government security of similar maturity. At 70 bps, this works out to 9.27%, which is an attractive return.
The NCD will have a tenor of 19 years, with principal redemption in five equal instalments starting from the 15th year and interest payments will be made bi-annually. The programme is part of the government's restructuring plan to revive the airline.
AI will have to open a designated bank account in which interest payments as well as principal repayments will be deposited by the issuer or guarantor.
According to rating agency Fitch, "Future developments that may, individually or collectively, lead to negative rating action include: failure of GoI to meet its obligation in a timely fashion on invocation of guarantee, attachment of the designated account by receiver/liquidator and AI's subsequent inability to vacate the designated account within such time frame so as not to affect the access of the trustee to the monies in the account, such that the trustee may pay the NCD holders on time."
AI has an operating fleet of 92 aircraft (35 owned and 57 leased). The company has an extensive network and operates flights to 50 Indian cities and 26 international destinations.

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