Government To Service Payments For Air India’s Rs 7,000-Crore Bond

The government will guarantee payments on a bond issue by a special purpose vehicle that holds nearly half of Air India Ltd.’s debt, two bankers aware of the development told BloombergQuint.

Air India Assets Holdings Ltd. will issue a Rs 7,000 crore government-serviced bond on Sept. 16 in tranches, with a base issue of Rs 1,000 crore and a greenshoe option of Rs 6,000 crore, the bankers said on the condition of anonymity as the information is not public yet.

The bond will have a three-year tenure with semi-annual coupon payments, they said.

The government plans to raise a total of Rs 22,000 crore for Air India Assets Holdings through bonds. The remaining Rs 15,000 crore would be issued in the following weeks or months depending on the market situation, the second banker quoted above said. It will be for a longer tenure than the current issue, this person said.

Air India Assets Holdings and Air India have yet to respond to BloombergQuint’s emailed queries.

While the airline expects to post operating profit this year, it doesn’t generate enough cash to service its Rs 60,000-crore debt. The government set up Air India Assets Holdings as a special purpose vehicle in January last year to “warehouse” working capital loans not backed by any assets. Air India Assets Holdings holds around Rs 29,464 crore of the carrier’s debt. The government also made provisions worth Rs 2,600 crore towards for the special purpose vehicle in the budget. And the bond issue is aimed at helping the carrier meet its debt obligations.

ICRA Ltd and India Ratings and Research have both issued a AAA rating on the Rs 7,000-crore bond issue.

A government guarantee against a bond issue assumes that the government will take on the burden of repaying investors in case the issuing company fails to make the payment, the second banker said.

A government-serviced bond, according to one of the bankers, means that it doesn’t have a sovereign guarantee. Instead, it creates an obligation on the government to put all principal and interest payments into an escrow-like account before the payment dates, the person said.

The special purpose vehicle will undertake asset sales of Air India’s subsidiaries and non-core assets like land, and the proceeds will be kept in an escrow for servicing the bond. But given that it will take time, there is a direct obligation on the government to pay the principal and interest, the first banker explained.

Air India Assets Holdings has accumulated non-operational assets of Air India, along with four subsidiaries—Air India Air Transport Services Ltd., Airline Allied Services Ltd., Air India Engineering Services Ltd. and Hotel Corporation of India Ltd.—according to a media statement. Also, the non-core assets of Air India such as paintings and artefacts have been shifted to the special purpose vehicle, the release said.

In its ratings rationale, ICRA said, “The company (Air India Assets Holdings) shall open a no lien designated account, which would be exclusively used for servicing the liability towards rated non-convertible debentures. If the designated account does not have adequate funds on or before 30 days prior to the due date, it shall constitute an event of default.”

If the default continues up to eight working days before the due date, the trustee will have to send a notice to the government, which in turn will transfer the adequate funds to the designated account, the rating agency said.

Essentially, this bond issue is a refinancing mechanism to repay the existing debt of Air India and its subsidiaries, the people quoted earlier said.

Once the bond is placed on the electronic bidding platform of the stock exchanges on Sept.16, bids are expected to come from domestic and overseas investors, the first banker quoted above said. But overseas investors could take a credit-risk and currency-risk perspective, the person said.

The pricing of the bond, the bankers said, would depend on the demand from investors, and it will be higher than the prevailing AAA-rated public sector unit bond yield.

Arvind Chari, head of fixed income and alternatives at Quantum Advisors Pvt. Ltd., said it’s practically a government bond. “Earlier government guarantees in other PSU bond issues were limited whereas this is bond is a more transparent issue in terms of the government’s obligation,” he said. “The only question is that this is a very large issue [Rs 7,000 crore] in one tranche. So banks will also have participate apart from investors for the issue to sail through.”

Purely because of its size, one should expect a higher spread and yield on the bond issue compared to other PSU bonds of similar tenor, he said. The three-year PSU AAA bond yield stood at 6.69 percent as on Sept. 12, 2019.

Air India Disinvestment

The government is making a second attempt to sell Air India in a financial year when it has set a target to raise Rs 1.05 lakh crore through divestments. Last year, it failed to sell a 76 percent equity stake in the airline as it received no buyers.

Civil Aviation Minister Hardeep Singh Puri said prospective buyers are interested in Air India as it has 120 aircraft, 60 of which are fully-owned. The carrier operates on 80 domestic and 40 international routes.

“It has an unsustainable debt so the commitment to privatise Air India is total and I wouldn’t worry about the previous attempt to disinvest. Maybe, we have learnt lessons from that,” he told Bloomberg, adding the aviation sector is growing at 17 percent a year which makes the national carrier an attractive buy.

Puri also said the government has set up an alternative mechanism or a group of ministers which will meet shortly to prepare an outline for the privatisation of Air India.

Watch the full interview here: