Mumbai: National carrier Air India is seeking $1.15 billion (Rs5,106 crore) from global banks to refinance a loan taken to fund the purchase of 21 Airbus SAS planes and related equipment, seeking to tap a global liquidity glut and encouraged by the response of international lenders to a previous tender that sought to raise $475 million.
For the first time, Air India will be furnishing only one security instead of two in exchange for the loan—either a sovereign guarantee offered by the government or aircraft as collateral, officials familiar with the situation said. Earlier, the airline used to offer both for long-term loans.
The move to offer a single security follows the government’s decision that the state-run carrier should give only one kind of collateral. The government has directed Air India to offer a part of its sovereign guarantee to raise working capital loans at cheaper rates.
A sovereign guarantee gives banks the assurance that the government will repay a loan if the borrower is unable to do so.
The carrier is trying to take advantage of liquidity sloshing around the world to raise funds at cheaper rates than existing debt to reduce interest costs. Mexico last week sold $1 billion of 100-year bonds, which carry a coupon of 5.75%, at a yield of 6.1%.
Air India, which has accumulated losses of Rs14,000 crore in the last four fiscals, is burdened by debt of Rs18,000 crore it raised for working capital at high interest rates. Apart from this, the airline has to raise long-term loans to finance fleet-expansion.
In 2007, the airline ordered 111 aircraft—43 from Airbus and 68 from Boeing Co.—worth a combined $11 billion. It has already raised at least $3 billion in loans to fund the purchase.
The new tender for the $1.15 billion loan comes on the heels of 16 international lenders offering Air India the $475 million loan it sought. US-based Citigroup Inc. beat the other lenders in the running to offer this loan.
“The government is willing to offer only a part guarantee for the long-term loans for buying aircraft. The decision to award the mandate to Citigroup for raising $475 million is also kept in abeyance as the tender for the same was floated before the government decided to offer only a single security cover for long-term loans,” said a senior official at the ministry of civil aviation, who didn’t want to be named.
In May, Air India floated the tender for raising $475 million to replace a loan taken from Standard Chartered Plc. Several global banks such as BNP Paribas SA, Deutsche Bank AG, JPMorgan Chase and Co. and ING submitted their bids to Air India, apart from Citibank and Standard Chartered.
The new $1.15 billion loan is also meant to refinance a loan of the same amount taken from a consortium led by IDBI Bank Ltd. According to the Air India website, the money was used to purchase aircraft, spare engines and other related equipment such as simulators, workshop tools and ground equipment.
The deadline for submitting the new bids is 10 November, according to the website.
“The current IDBI Bank-led consortium loan is backed by government guarantee as well as aircraft as security. The purpose of raising $1.15 billion is to replace the rupee loan of IDBI Bank of the same amount with interest rates of 11-11.5%,” said an Air India executive, who also did not want to be identified.
Air India is looking at raising the money either through a US dollar loan linked to the London inter-bank offered rate (Libor) or a rupee loan linked to government securities or corporate bonds with AAA ratings, said the executive.
In April, Air India sold Rs795 crore of rupee bonds to partly fund the cost of aircraft purchases. The entire issue was bought by Standard Chartered.
A second Air India executive said that by offering the comfort of two securities, Air India had been able to negotiate attractive interest rates linked to Libor, the international benchmark of overnight borrowings in the money market.
According to analysts, the absence of a sovereign guarantee or the offer of a part guarantee would have an impact on the rates Air India can borrow at.
“Without the government guarantee, banks may opt for cautious exposure to Air India and will price the loan according to it,” said Suresh Ganapathy, head of the financial research team at Macquarie Securities Group. “Banks would be comfortable with the government guarantee for giving long-term loans, considering the tough phase that Air India is currently going through.”
SBI Capital Markets Ltd is, meanwhile, drawing up a debt-restructuring plan for Air India, which is looking at interest rates being cut to 8-9% from 12%, which will result in the carrier saving Rs500-600 crore.