Mumbai: Cash-strapped flag carrier Air India, run by National Aviation Co. of India Ltd, or Nacil, and an affiliate plan to sell Rs795 crore of non-convertible debentures or rupee bonds to partly fund the cost of aircraft purchases, according to two Nacil executives. It will be the first bond sale ever by Air India.
The sale of the 10-year bonds that will hit the market next week is divided into two portions. Nacil will sell bonds worth Rs700 crore while its subsidiary Air India Charters Ltd, which operates low-fare international carrier Air India Express, will sell securities worth Rs95 crore, said the executives who didn’t want to be named.
Both issues will be backed by a sovereign guarantee, or a pledge by the Union government that it will repay investors if the firms are not in a position to do so when the bonds mature.
The guarantee has led to rating agency Crisil Ltd assigning its highest “AAA (so)/stable” rating to the funding programme. The “so” suffix denotes instruments with a structured obligation.
“The rating is based on the strength of the credit enhancement facility provided by an unconditional and irrevocable guarantee for the entire rated amount from the government of India through the ministry of civil aviation, and a trustee-administered payment mechanism,” Crisil said in a statement on its website.
Both firms will issue 10-year rupee bonds and interest will be payable twice annually.
Typically, the spread, or difference between a sovereign bond and a triple-A rated corporate bond, is 100 basis points (bps) or 1 percentage point. The 10-year government bond yield that rose beyond 8% recently closed at 7.83% on Friday. Following the rise in the Reserve Bank of India’s policy rate by 25 basis points, the 10-year yield is expected to rise to 8%.
This means Air India will need to pay at least 9% for raising the money. Still it will be cheaper than bank loan; it needs to pay around 12% for long-term commercial loans.
In 2005, Air India placed orders for 111 aircraft, 43 from European firm Airbus SAS and 68 from US-based Boeing Co. Air India had raised $1.1 billion (Rs5,005 crore today) from US bank JPMorgan Chase and Co., backed by guarantees from the US Export-Import Bank, to fund 85% of its third round of aircraft acquisition, including seven Boeing 777 planes and three Boeing 737 planes.
“Air India would utilize this Rs795 crore to fund remaining 15% of aircraft acquisition,” said one of the two Nacil executives cited above.
Nacil had originally planned to raise commercial loans from banks, but later decided to opt for a bond sale. With a monthly cash deficit of Rs400 crore every month, the struggling airline is expected to post a loss of Rs5,400 crore for the fiscal ending March.
“In this context, bond issue was a suitable option,” said the second Nacil executive, pointing out that for a commercial loan, the airline would have to start repaying the principal after a few years. Typically, for long-term loans, banks offer clients a five-year moratorium for repaying the principal amount.
In contrast, a bond issuer pays only the interest until the maturity of the bonds—in this instance, 10 years—when the principal amount is paid.
The longer duration of the bonds will also help Air India as the fleet renewal is expected to help the company start making a a profit in 7-10 years after it recoups the cost of acquiring them.
“By the time we are ready to repay the loan, our planes would be making money,” the second executive said.