Mumbai: UK-based Standard Chartered Plc, the second largest foreign bank in India by assets, may buy the entire Rs795 crore of non-convertible debentures, or rupee bonds, being sold by state-owned National Aviation Co. of India Ltd (Nacil), which operates flag carrier Air India, according to three persons familiar with the development.

Photo: Abhijit Bhatlekar/Mint

The bond issue, which will hit the market this week, is supported by a sovereign guarantee, or a pledge by the Union government that it will repay investors if Nacil is unable to do so when the bonds mature.

“Standard Chartered has won the mandate (and) they are still evaluating the prospects of underwriting the entire bond issue," said one of the persons familiar with the development, adding that the pricing and structure were being worked on. He, like the others, declined to be named.

Nacil executives were not available for comment. A spokesperson for Standard Chartered declined to comment.

A senior official at the ministry of civil aviation said the deal made sense for the bank because, being backed by a sovereign guarantee, it could “easily resell (the bonds) in the market at a later date". The bonds will pay interest of a little over 9%, he added, declining to be named because he is not authorized to speak to the media.

Typically, the spread, or difference between a sovereign bond and a triple-A rated corporate bond, is 100 basis points or 1 percentage point. The 10-year government bond yield that rose beyond 8% recently closed at 7.86% on Friday. Even at 9%, the bond sell will be still cheaper than a bank loan as Nacil would have had to pay around 12% for a long-term commercial loan.

“It’s a good bet for Standard Chartered as it has a secured return of 9% with a government backing," said Vijay Nara, an aviation analyst at domestic brokerage Centrum Broking Pvt. Ltd. “For Air India, this will be a short-term relief as they are desperate for cash..," he said, noting that the airline had deferred payment of its March salary by a week.

Air India is expected to post a loss of Rs5,400 crore in the current fiscal. It had losses of Rs2,226.16 crore and Rs5,548 crore during fiscal 2007-08 and 2008-09, respectively. The trend of losses is likely to continue for a few more years, civil aviation minister Praful Patel told Parliament earlier this year.

The bond issue will partly fund Nacil’s aircraft purchase, including seven Boeing 777 planes operated by Air India and three Boeing 737 planes operated by its affiliate Air India Express, a low-fare international carrier.

In 2005, Nacil placed orders for 111 aircraft—43 from European firm Airbus SAS and 68 from US-based Boeing Co. Nacil had raised $1.1 billion (Rs4,987.4 crore) 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. The sovereign guarantee on the bonds has led to credit assessors Crisil Ltd and Fitch Ratings India Pvt. Ltd assigning the securities their highest grades.

While Crisil assigned an “AAA (so) /stable" grade, with so’ denoting instruments with a structured obligation, Fitch handed them an “AAA(ind)(SO)(Exp)" rating. “Ind" stands for India and “Exp" indicates that the rating is based on the agency’s expectations, after a review of the final draft documentation.

The sale of the 10-year bonds is divided into two portions. Nacil will sell Rs700 crore of bonds while its subsidiary Air India Charters Ltd, which operates Air India Express, will sell securities worth Rs95 crore.

In its rating statement, Fitch noted that Nacil is working on a plan to reduce the losses through improvements in efficiencies and operating costs.