Sovereign guarantee to cut AI interest

National Aviation Company of India Ltd (Nacil) will be able to save more than 30 per cent on its interest payment per year, as the finance ministry recently agreed to furnish sovereign guarantees on loans raised by the company which runs Air India. Nacil pays Rs 1,800 crore a year as interest to banks.

“We will be able to save Rs 550 crore per annum on the entire working capital borrowing of Rs 18,500 crore,” said a top Air India official, who did not want to be identified. “Our interest payment on the working capital loan is Rs 1,800 crore and the sovereign guarantee will be of much help to us,” said another official on condition of anonymity.

With the sovereign guarantee, Air India could reduce its interest rates by up to 150 basis points. The carrier has been looking to convert its high-cost debt to low-cost to extricate itself from financial mess.

The working capital loan has been borrowed at an interest rate of 12 per cent per annum. The loan is for payment of employees salary and other operational payments.

Air India has losses of over Rs 12,000 crore and is expected to make operational profit by the end of this financial year.

However, bankers say Air India will not be able to save much because the interest rates have firmed up.

“The benefits of sovereign guarantee could be of 150 basis points, but the interest rates in the recent weeks have gone up by 50 basis points. This will limit the benefits Air India will get out of the guarantee,” said the chief of a state-owned bank with exposures to the airline.

The Air India board recently put together a financial restructuring package, which included restructuring its working capital loans through a mix of bonds with longer tenor and bullet payments. It had also suggested monetising land and buildings through outright sale or as security for fresh loans.