Air India seeks fresh debt of over Rs 1,000 crore this week
The loan is part of the Rs 6,150 crore that Air India plans to use to refinance costlier bridge loans taken to purchase Boeing 777 and 787 planes
The debt-ridden and privatisation-bound Air India is looking to raise around Rs 1,000 crore this week in order to retire comparatively costlier foreign currency bridge loans. This would be the last tranche that would complete fundraising of about Rs 6,150 crore in short-term loans from local lenders, a report said.
The fresh debt would be used to refinance costly bridge loans taken to buy seven Boeing 777 and 787 wide-body aircraft, according to a report in Live Mint.
The Rs 6,150 crore loan had been planned to be raised in seven tranches, with three tranches of Rs 790 crore each, three of Rs 925 crore each and the last one of Rs 1,005 crore. The loans would be carrying a sovereign guarantee.
The national carrier had offered its Boeing 777 and 787 aircraft as collateral for the loans, which would be repaid in a year, according to a tender document on the airline's website mentioned by the report.
A bridge loan is essentially is a gap financing arrangement, whereby short-term loans at high rates are given for meeting short-term liquidity needs. Its purpose is to typically bridge the gap between short-term cash needs and long-term loans. They are usually backed by asset collateral like equity, debentures and so on.
Bidding for Air India would now be on enterprise value. Image courtesy: Facebook/Air India
Refinancing of an existing loan may be sought to obtain more favourable borrowing terms, including decreasing the fixed interest rate to reduce payments over the life of the loan, to change the loan duration, or to pay off existing debts by consolidating them into one loan that is priced lower.
The interest rate payable by Air India would be linked to “MCLR/G-sec rates with a reasonable spread as margin", as per the tender document, the reports said. The MCLR (marginal cost of funds based lending rate). Banks cannot lend at a rate lower than the MCLR of a particular maturity for all loans linked to that benchmark. It is a tenor-linked internal benchmark. This means that the rate is internally determined by the bank based on the time left for the repayment of the loan.
The national carrier currently sat on a massive debt of Rs 60,074 crore as on March 31, 2019. However, the government recently sweetened the Air India deal further by allowing bidding on the enterprise value of the carrier instead of the equity value. While the enterprise value of a company includes its equity value, debt and cash with the company, its equity value is the value of the company’s shares.
Thus potential investors would have the flexibility to absorb the amount of debt they want. According to the expression of interest (EoI) floated by Department of Investment and Public Asset Management (DIPAM) in January, the buyer would have to absorb Rs 23,286.5 crore, or more than one-third of the airline's total debt, while the rest would be transferred to the Air India Assets Holding Ltd (AIAHL) -- a special purpose vehicle.
The bidders would now have the option to decide on how much debt they want to absorb and the cost they would pay for the carrier. The government, which had cut Air India's debt to Rs 23,286.5 crore from a little over Rs 33,000 crore (according to the 2018 offer) to make the deal attractive to the investors, has now left it on the investors to decide on it.
Air India has not seen profits since its merger with Indian Airlines. Image courtesy: Facebook/Air India
Out of whatever the enterprise amount that the bidder quotes, 15% would have to be given to the government as the price of Air India and 85% would be debt that the winning bidder would absorb, civil aviation secretary Pradeep Singh Kharola was quoted as saying by PTI. The willing bidder would have to pay 15% of the quote as upfront cash payment, disinvestment secretary Tuhin Kanta Pandey said, according to a Business Standard report.
According to a Live Mint report last year, Air India witnessed a record loss of Rs 8,556.35 crore in 2018-19 and had not seen profits since its merger with Indian Airlines in 2007-08. It is surviving on taxpayer money. According to Air India Chairman and Managing Director Rajiv Bansal, the airline could end up making a loss of around Rs 8,000 crore this fiscal.
The government is looking to offload its entire stake in the debt-ridden carrier, including Air India’s 100% shareholding in Air India Express and 50% in Air India SATS Airport Services. AISATS, which offers ground-handling services is an equal joint venture between Air India and SATS Limited, a leading gateway services and food solutions provider in Asia.
The airline was put on the block on January 27 and the initial deadline for submission of bids was March 31. It was first extended to June 30 and then to August 31. It was again extended to October 30 in view of the situation arising out of the Covid-19 pandemic. Now, the new deadline has been set as December 14.
In 2018, the government had offered to offload 76% equity share capital of Air India, as well as give up management control. But there were no takers for the offer at that time, which led the government to dilute the deal terms. The government has rejected Air India's request for equity infusion but has agreed to be a sovereign guarantor for the carrier's debt.