Air India tries to fight debt burden in profitablity chase

A Monday report in The Economic Times said the state-run carrier is looking to convert its debt into equity through the Sustainable Structuring of Stressed Assets or S4A scheme

Air India’s plans of converting Rs 10,000 crore debts into equity will give a much needed push its ambitious turnaround plan of becoming profitable by FY2018.

On Monday, The Economic Times reported that the state-run carrier is looking to convert its debt into equity through the Sustainable Structuring of Stressed Assets or S4A scheme. The scheme permits lenders to determine and segregate debt into a 'sustainable debt' component (representing the loans which are capable of being serviced by the current cash flows of the company) and to restructure the balance into equity or quasi-equity instruments which are expected to provide an upside to the lenders in case of recovery.

Business Standard could not independently verify the report but a senior Air India official explained that the airline will need to significantly improve its financial metrics before the lenders are interested in such a proposal. 

“There are several plans which include asking the banks to convert debt into equity but that will work out only when the airline is profitable,” said one official. He said that he was unaware of any restricting plans.

The airline's chairperson Ashwani Lohani has said that the national carrier is looking to clock net profit by FY18, two years earlier than what was originally envisioned in the Turn Around Plan (TAP) approved in 2012.

But Lohani has been categorical in pointing out that historical reasons have led to a huge debt burden which needs to be cleared. The airline has total debt of more than Rs 51,000 crore till March 31, 2015. Minister of State for Civil Aviation Mahesh Sharma said in Parliament in March that Air India's total debt burden of Rs 51, 367.07 crore includes Rs 22,574.09 crore outstanding on account of aircraft loans.

The Finance Ministry has also recently approved a proposal from the civil aviation ministry to give the national carrier a part of the annual bailout package as grant from the government.

Air India has approached the government asking it to guarantee non-convertible debentures (NCD) worth Rs 10,500 crore that it wants to issue against long-terms debt on its books.

Converting loans into NCDs would bring down the interest rate by about 2%, senior executives at the airline said.

Terming AI's financial situation as precarious, the National Transport Development Policy Committee, which was set up in 2010, had also said that the airline would need to be recapitalised, restructured organisationally, its working capital debt burden written off and some divisions made independent and corporatised.