Mumbai: State-run National Aviation Co. of India Ltd, or Nacil, the operator of Air India, is raising about $1 billion (around Rs4,870 crore) in the form of an 11-year loan from US bank JPMorgan Chase and Co. to fund a part of its ambitious fleet expansion exercise.
The loan, guaranteed by the US Export-Import Bank (US Ex-Im Bank), according to two bankers familiar with the transaction, may help the cash-strapped airline save about $1 million a month in interest costs. Nacil posted a Rs5,000 crore loss in fiscal 2008-09.
Control measures: Civil aviation minister Praful Patel. Harikrishna Katragadda / Mint
“Nacil had floated a tender to raise $1.06 billion to buy 10 Boeing planes. It is getting this loan from JPMorgan at attractive terms,” said a senior official of the ministry of civil aviation, who didn’t want to be named.
The official declined to disclose the cost and structure of the loan. A banker aware of the deal said the loan is being raised at around 100 basis points (one basis point is one-hundredth of a percentage point) over the London interbank offered rate (Libor). Six-month Libor is now close to 1%. Kalpana Morparia, chief executive officer of JPMorgan Chase’s India operations, declined to comment for this story.
Typically, loans guaranteed by the US Ex-Im Bank, the US government’s trade financing arm, are cheaper than normal external commercial borrowings. The US Ex-Im Bank offers guarantees for loans used to purchase goods or machinery from the US, based on a counter-guarantee by the local government.
Nacil will use this money to buy three 777-200 and four 777-300 planes from Boeing Co. for its international operations, as well as three 737-800 planes to ply on domestic routes. Nacil is also buying one aircraft engine from General Electric Co.
These purchases are part of an order Nacil made in 2005, at the peak of the aviation boom in India, for 111 aircraft—68 from Boeing and 43 from Airbus SAS—at a list price of nearly $15 billion.
In February, Nacil floated a tender for financing 10 aircraft for up to $1.1 billion. It received 12 bids from international and domestic banks.
JPMorgan won the mandate in May with the lowest bid. It beat State Bank of India, Barclays Plc and Standard Chartered Plc of the UK, Citigroup Inc. and Goldman Sachs of the US, BNP Paribas SA of France, Deutsche Bank AG of Germany and Australia’s Macquarie Bank Ltd.
“The US Ex-Im has issued its final commitment for this transaction and Air India can draw the loan on completion of the documentation. The key is issuance of the sovereign guarantee in favour of US Ex-Im,” said the banker quoted earlier.
While JPMorgan will arrange the loan to fund 85% of the aircraft acquisition cost, the remaining money is being sourced from Standard Chartered Bank. It will be rupee-denominated financing and the UK bank’s local arm will raise the money through a bond issue on the basis of the Indian government guarantee.
Aiming high: Nacil will use the money to buy 10 Boeing aircraft—seven for its international operations and three to ply on domestic routes. Ramesh Pathania / Mint
On 2 July, civil aviation minister Praful Patel told Parliament that Nacil’s borrowings had risen steeply from Rs6,550 crore in November 2007 to Rs15,241 crore in June 2009.
“This has been largely due to servicing of debt on account of purchase of new aircraft as also operating losses which have compounded due to economic recession and high oil prices,” Patel said.
In March, Nacil had tied up with a consortium led by IDBI Bank Ltd for borrowing up to $1 billion to purchase 21 Airbus-made planes.
“Nacil had raised more than $3 billion at aggressive rates. Out of 111 planes, 49 have already joined our fleet. We have not defaulted on any loans till now,” the Nacil executive said.
A senior analyst tracking aviation stocks with a domestic brokerage said the JPMorgan loan will help Nacil save on interest costs and meet aircraft payment schedules. Nacil had taken bridge financing in the interim period to take deliveries of the aircraft, between June and December. It will repay the relatively more expensive bridge loan now.
“We are not tracking Nacil, since it’s not a listed entity. It could manage to raise (the) loan mainly because of the guarantee extended by the government of India. Bankers feel comfortable to give loans to those state-run companies where the government agrees to act as a guarantor,” said the analyst, who didn’t want to be named.
The Nacil executive said the state-run carrier has no plans “to delay the aircraft acquisition” because it needs to replace older planes in its fleet. It is also not extending the contracts on the leased planes it is flying.
Nacil is among the top 10 loss-making units that depend on the Central exchequer for meeting their expenses, and it is in the process of submitting a turnaround plan by early August to Prime Minister Manmohan Singh.
India’s loss-struck domestic airlines are seeking working capital and funds for fuelling their expansion during the economic slowdown that has dented passenger traffic. Financial institutions, however, are cautious about lending to airlines given their combined $2 billion in losses for fiscal 2009.
Jet Airways (India) Ltd has raised nearly Rs1,250 crore from two banks to meet its working capital needs, and is looking for additional term loans. Rival Kingfisher Airlines Ltd is also planning to raise some $400 million to fund its expansion.