Air India to prepay debentures at a premium on investors' insistence

Investors sought premium after airline offered to prepay Rs 12,900 cr of bonds at par in Nov

The investors of Air India's debentures have asked the airline to prepay the bonds at a premium instead of the airline agreeing to prepay the bonds on par in November last year. Prepaying the bonds at a premium would entail additional cost to the Indian government which was prepaying Air India's debt as part of the airline’s privatisation plan.

In November last year, the airline had announced that it would prepay non-convertible debentures worth Rs 12,900 crore (Two series of Rs 7,400 crore and Rs 5,500 crore) from investors. The investors however sought additional prepayment charges as they would lose interest on the debentures for the rest of the term. The NCD holders have asked for an additional two per cent as premium on the debentures.

The Tatas had offered to pay Rs 18,000 crore as enterprise valuation to the Indian government to take over the airline in October last year. Of this offer, the Tata group was taking over Air India debt worth Rs 15,300 crore and the rest was to be paid to the Indian government as cash for the airline’s equity.

An email sent to Air India did not elicit any response.

But before the actual handover, the Indian government will prepay part of Air India’s loans so that the new owner acquires the company with a clean slate. However, the transaction does not include non-core assets of Air India such as land and buildings that are to be transferred to Air India Asset Holding Ltd (AIAHL) --- a holding company owned by the Indian government. After Air India’s loans are prepaid, the airline will be handed over to the Tatas.

Air India debentures were attractive to the investors as the Indian government had provided unconditional and irrevocable guarantees covering the entire amount through the Ministry of Civil Aviation. Besides, the debentures were supported by the Indian government undertaking that its guarantees will remain unaffected by any infirmity or irregularity on the part of Air India to undertake any of its obligations under the NCD programme. Several investors, including private provident funds and banks, had invested in the NCD due to the high rating of Air India’s debentures.

The Tata group was also trying to raise funds to replace the loan it would take over in Air India. A banker said the Tata group was raising Rs 23,000 crore to fund the acquisition and was looking to raise funds at an interest rate of 4-5%. Air India was paying around 9-10.5 per cent of interest on the debentures which it is planning to prepay now.