Air India offers lenders equity for debt

Desperate times call for desperate measures. The civil aviation ministry and the Air India management are wooing state-owned banks to convert part of their loans into equity in the airline, according to three people close to the development.

The total debt on Air India’s books stands at over Rs40,000 crore, of which around Rs20,000 crore is for working capital and the remaining for aircraft purchase.

The working capital loan was raised from a consortium of 22 banks and Air India has been negotiating to restructure this loan. Now, with the government reluctant to infuse more equity in the bleeding airline, its management is left with no option but to persuade banks to convert at least some of it into equity and the remaining into long-term debt, which would help reduce the interest burden.

As per airline estimates, if banks convert Rs16,000 crore worth of working capital loans into equity and the remaining into long-term debt, it could save the airline around Rs450 crore in interest payment each year.

Banks are also being asked to restructure the aircraft acquisition loan of Rs20,000 crore under a sovereign guarantee, which could save another Rs780 crore of interest payment a year.

“The presentation regarding this matter has been made to bankers and they have formed a core committee to decide upon it. It will take about a month before a final decision is announced. But bankers are not interested in this. They are not happy with so much concession (conversion of 40% debt into equity),” a senior official of Central Bank of India told DNA on condition of anonymity.

A State Bank of India official also doubted the proposal will pass muster with banks. “I doubt anybody agreeing, in view of the timing.”

A senior Air India official confirmed the move to get banks to convert some loan into equity. “We are more than ready… but the banks do not seem to find it a viable option.”

A civil aviation ministry official conceded as much. Though this would mean partial divestment of the government’s stake (100% now), the move was essential for the airline’s survival. SBI leads the consortium of banks and is also formulating the airline’s turnaround plan, so it is fully aware of the airline’s financial health, the official said.

On a recent move by some banks to convert loans into equity in Kingfisher Airlines, the ministry official said a similar approach should be followed for Air India.     

“Bankers have told us that the government should infuse equity and we will take care only of the interest burden. But this is not going to work out. We had even approached the finance ministry to persuade bankers but this hasn’t worked,” the official said.
Ministry officials have earlier said that banks have agreed to convert some short-term loans into long-term ones, effectively bringing down the interest outgo to 9% from 13-14%.

“The banks have set only one condition: AI should procure a letter of comfort or sovereign guarantee from the government for lower rates to take effect. We are expecting this letter of comfort after the government approves AI’s turnaround plan,” said an official.
In its presentation to bankers some time back, Air India had promised to increase revenues by Rs5,000 crore and slash costs by Rs4,000 crore per annum so that the airline achieves operational profitability by 2015.

Whether the bankers agree to its proposal or not, the ailing national carrier needs Rs17,000-18,000 crore equity infusion to raise loans needed for aircraft purchase and go in for expansion.

A turnaround plan vetted by the airline’s board of directors has already sought this amount in the form of equity from the government. But the plan is yet to be approved by the ministry. And the government is unlikely to release such a large amount of equity, given the uncertainty surrounding the airline’s turnaround.