Lack of govt guarantee to push up cost of Air India’s $1.6 bn loan

Mumbai: Air India may have to pay more to borrow $1.6 billion (Rs7,456 crore) and start the whole process of fund-raising anew because the government is not willing to stump up a full sovereign guarantee as well as pledge aircraft as collateral for the loans, said a civil aviation ministry official and an executive at the national carrier familiar with the situation.
The airline, which needs the money to fund aircraft purchases, has received attractive offers from financial institutions, but the cost of borrowing will increase if either of the two conditions placed by the potential creditors isn’t met, said the two persons, who spoke on condition of anonymity.
A sovereign guarantee gives creditors the assurance that the government would step in to repay a loan if the borrower is unable to do so. The government is ready to offer a sovereign guarantee for Air India’s working capital loans; it’s willing to offer only a part guarantee for the term loans it wants to raise for buying aircraft, the two persons said.
In 2007, the national carrier had embarked on an ambitious fleet acquisition project, ordering 111 aircraft—43 from Airbus SAS and 68 from Boeing Co.—worth a combined $11 billion.
It has already raised at least $3 billion in loans from banks to fund the purchases.
According to the Cape Town Convention, an international treaty designed to facilitate asset-based financing and leasing aircraft, to which India is a signatory, a state-owned airline will have to both pledge aircraft as security and offer a sovereign guarantee while raising loans.
23/08/10 PR Sanjai/Live Mint

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Categories: NACIL Aug 2010