Air India bond sale to buy Dreamliners

Air India Ltd, which got a government bailout to avoid bankruptcy this year, is planning its biggest bond sale to refinance costlier debt, as it prepares to add Boeing Co’s Dreamliner planes.

The airline is offering Rs 7,400 crore ($1.3 billion) of 19-year notes at a maximum of 9.5 per cent, according to a statement on its website.

It issued 20-year securities at 10.05 per cent in September 2011.

Benchmark five-year bond yields for AAA-rated Indian companies fell 27 basis points this year to 9.25 per cent as central bank Governor Duvvuri Subbarao cut interest rates for the first time since 2009 to arrest an economic slowdown. Similar US rates dropped 20 basis points.

Air India is banking on debt guarantees and almost $6 billion in government cash injections to revive a business that has made losses since 2007. The company is modernising its fleet to save as much as 20 per cent in fuel consumption, attract passengers and open routes only profitable with newer planes.

“The sale will help Air India replace high-cost borrowings with lower-interest debt,” R K Gupta, the New Delhi-based managing director of Taurus Asset Management Ltd, which oversees the equivalent of $679 million, said in an interview on July 13. “It will find takers because of the government guarantee. Public-sector banks and insurance companies will be particularly keen to bid, as they always seek long-term paper.”

The Mumbai-based airline is boosting borrowings to expand operations as CAPA Centre for Aviation, an industry consultant, predicts India’s air traffic will grow 10 per cent this year.

The company is raising $195 million in loans from Standard Chartered Plc to pay for the first two Dreamliner aircraft, according to a statement in March. It also plans to borrow, along with its unit Air India Charters Ltd, an additional $600 million overseas, according to tender documents on its website.

Government backing is helping Air India access funds while privately-owned rivals are short of cash even after shutting some services. Billionaire Vijay Mallya’s Kingfisher Airlines Ltd has been seeking funds since at least November after more than 10 straight quarterly losses that prompted a cut in daily flights to 120 in March from about 340 last year.

Jet Airways (India) Ltd, the nation’s biggest carrier, is looking to sell or lease out surplus aircraft to reduce debt after facing losses for five quarters because of fuel costs and a price war. Last financial year, the airline converted Rs 400 crore of loans into dollar-denominated debt to cut interest expense.

Industry wide losses at the nation’s airlines totalled more than $2 billion in the year ended in March, according to CAPA. That may narrow to as much as $1.4 billion in the current financial year, the consultant estimates.

“Air India is enjoying an advantage that may not be quite correct, ethically,” said P Phani Sekhar, a trader in Mumbai at Angel Broking Ltd. “There’s no level playing field, if you look from a competition perspective.”

Rupee debt costs have declined this year as the Reserve Bank of India cut its repurchase rate in April by 50 basis points, or 0.5 percentage point, to 8 per cent. Benchmark 10-year sovereign bond yields dropped 47 basis points in 2012, according to data compiled by Bloomberg. The extra amount investors seek to hold the notes instead of US Treasuries has retreated 32 basis points from this year’s high of 694 in May.

That fuelled a 46 per cent jump in issuance of rupee-denominated securities this year to Rs 1.1 lakh crore, data compiled by Bloomberg show. The Reserve Bank will cut its repo rate further by 50 basis points at the next review on July 31, analysts at Citigroup Inc, including Singapore-based Gaurav Garg, predicted in a research note dated July 12.

“We may see a further spurt in bond sales after the next RBI policy meeting,” Pradeep Madhav, managing director at Mumbai-based STCI Primary Dealer Ltd, said in an interview on July 13. “Expectations of better liquidity and interest-rate cuts will support debt supplies.”

The yield on the benchmark 8.15 per cent government debt due June 2022 was little changed at 8.10 per cent on July 13, while the rupee gained 1.4 per cent to 55.145 per dollar. Indian bonds returned 5.5 per cent this year in the region’s best performance, according to indexes compiled by HSBC Holdings Plc.

Overseas borrowing costs for Indian companies have slid to a 10-month low as the government prepares to widen tax cuts on international debt sales. The average yield on the dollar- denominated notes of the nation’s firms fell 150 basis points this year to 5.33 per cent, HSBC Holdings Plc data show. A similar measure for Asia dropped 79 basis points to 3.91 per cent.

Air India is still far from a turnaround and its bond sale may have failed if not for the government guarantee, according to the CAPA Centre for Aviation.

‘No Value’
“If not for the government guarantee, there’s no value in those bonds,” Kapil Kaul, New Delhi-based head of the Indian unit of CAPA, said in an interview on July 13. “To turn around, the airline has to reduce losses and create more viable business model. That hasn’t happened yet. An actual turnaround of operations when the airline starts to break even and makes money is far off.”

Air India, once the country’s biggest airline, has slipped to fourth place behind newer private carriers Jet Airways, IndiGo and SpiceJet Ltd., which have lower costs and fewer staff. It lost about 80 billion rupees last fiscal year, according to CAPA. The company, which sought compensation from Boeing for delays in the delivery of the Dreamliner jets, is ready to take the aircraft as negotiations with the plane maker conclude, Chairman Rohit Nandan said in Beijing on June 11.

Dreamliner Effect
The 787 jet, also called the Dreamliner, may help Air India improve operations as well as brand image as the company would be the third carrier to receive one, after All Nippon Airways Co. and Japan Airlines Co. It is the first aircraft to be built with a large plastic fuselage, reducing fuel consumption. The Indian carrier has ordered 27 of the planes.

Bond risk for Indian companies dropped in 2012. The average cost of five-year credit-default swaps insuring against non- payment by seven local issuers dropped 75 basis points to 386, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets.

The yield on Air India’s 10.05 per cent bonds due 2031 has declined to 9.35 per cent from 9.55 per cent at the end of 2011 and 9.93 per cent on Sept. 30, 2011, when trading in the notes began, according to prices from the Fixed Income Money Market and Derivatives Association of India. “The new bond sale will help Air India cut borrowing costs,” Nasim Zaidi, secretary at Ministry of Civil Aviation, said on July 12. “The proceeds will be used to refinance part of the company’s working capital loans.”

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