AI plans first bond sale to pay for planes

Mumbai: Cash-strapped flag carrier Air India, run by National Aviation Co. of India Ltd, or Nacil, and an affiliate plan to sell Rs795 crore of non-convertible debentures or rupee bonds to partly fund the cost of aircraft purchases, according to two Nacil executives. It will be the first bond sale ever by Air India.The sale of the 10-year bonds that will hit the market next week is divided into two portions. Nacil will sell bonds worth Rs700 crore while its subsidiary Air India Charters Ltd, which operates low-fare international carrier Air India Express, will sell securities worth Rs95 crore, said the executives who didn't want to be named. Both issues will be backed by a sovereign guarantee, or a pledge by the Union government that it will repay investors if the firms are not in a position to do so when the bonds mature.The guarantee has led to rating agency Crisil Ltd assigning its highest "AAA (so)/stable" rating to the funding programme. The "so" suffix denotes instruments with a structured obligation."The rating is based on the strength of the credit enhancement facility provided by an unconditional and irrevocable guarantee for the entire rated amount from the government of India through the ministry of civil aviation, and a trustee-administered payment mechanism," Crisil said in a statement on its website. Both firms will issue 10-year rupee bonds and interest will be payable twice annually. Typically, the spread, or difference between a sovereign bond and a triple-A rated corporate bond, is 100 basis points (bps) or 1 percentage point. The 10-year government bond yield that rose beyond 8% recently closed at 7.83% on Friday. Following the rise in the Reserve Bank of India's policy rate by 25 basis points, the 10-year yield is expected to rise to 8%. This means Air India will need to pay at least 9% for raising the money. Still it will be cheaper than bank loan; it needs to pay around 12% for long-term commercial loans.
22/03/10 P.R. Sanjai/Live Mint

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Categories: NACIL Mar 2010