Air India debt recast ‘in final stage’, seen by June-end

Air India debt recast ‘in final stage’, seen by June-end

New Delhi/Mumbai: State-run Air India said on Thursday it is in “final stages" of discussions with banks for restructuring Rs20,000 crore of debt and expects to complete the formalities by end-June.

According to the plan, a portion of the debt will be converted into long-term loans at fixed rates of interest with the remainder being converted into cumulative redeemable preference shares which will be redeemed after 15 years.

For banks, to avoid a default from Air India-- reeling under accumulated loss of nearly Rs16,000 crore over three years -- the only option is to agree to restructuring lest they will be further burdened with a huge amount of non-performing loans.

The restructuring will help the airline save at least Rs600 crore in interest costs and boost liquidity, spokesman K. Swaminathan wrote in an email response to a Reuters query.

Air India has set a target to enhance its revenues by Rs5,000 crore and also to reduce costs by Rs4,000 crore a year, post the restructuring, according to its website.

Of the 26 lenders, at least four with whom Reuters spoke expressed concern about the restructuring package.

“They are asking for large number of concessions, longer period, more amount to be converted into cumulative redeemable preference shares and at lesser rate of interest," said one of the lenders, who did not wish to be identified.

In the quarter-ended March, non-performing assets (NPAs) of several mid-cap banks rose sequentially and analysts expect the uptrend to continue as rising interest rates curb repayment capabilities of borrowers.

“This (Air India restructuring) is going to be a negative, particularly for the public sector banks," said Deepak Tiwari, banking analyst at K.R. Choskey. “But it’s better to restructure than getting into NPAs."

“The public sector banks may resist such a restructuring if terms and conditions are not favourable to them. But if the government forces, they don’t have any other choice," he added.

“If we don’t go for this restructuring proposal, they’re not going to repay the term loan. And, no banker can afford to have such a huge NPA on his book," another lender said.

For this reason, and the backing of the government, Air India’s plan is likely to go through.

Loss-making Kingfisher Airlines, India’s second largest airline by market share, restructured its debt earlier this year by converting into equity almost Rs1,200 crore of loans from a consortium of 13 banks led by State Bank of India.

The lenders now own close to a quarter of the airline.

With Air India, which witnessed a pilots’ strike recently and has failed to operationally merge with Indian Airlines, things are a lot bleaker, analysts and lenders said.

Bankers to the beleaguered carrier includes State Bank of India, Punjab National Bank, Oriental Bank of Commerce, Bank of Baroda, Central Bank of India and Bank of India.

Sector all fine

Analysts and bankers, however, feel the airline sector, which has recently seen a healthy growth in load factor, has a lot of potential in Asia’s third-largest economy.

An investor with a time horizon of 9-12 months can invest in the sector for a 30-40% return, said Rashesh Shah, an analyst with ICICI Direct.

Bankers also do not think after Kingfisher and Air India, other airlines will have to take such desperate measures.

“I don’t think there is any problem in the sector. Go Air, it was until now a loss making company and it has turned the corner in 1-1/2 years. JetLite is doing well and SpiceJet is also doing extremely well," said a banking source.

Apart from volatility in crude oil prices, there is no other major worry for the sector in general, analysts said.