Loans raised by Nacil will get government backing

The finance ministry has agreed to furnish sovereign guarantees on loans raised by National Aviation Company India Ltd (Nacil), which flies under the Air India brand name. A top source in the ministry confirmed: “Yes, we will provide sovereign guarantee to Air India on its loans. After all, it is a company owned by the government.”   

The move comes just days after the Centre decided to tighten norms for sovereign guarantees to public sector enterprises. In order to check fiscal profligacy, the FRBM Act had suggested that sovereign guarantees by the central government should not exceed 0.5 per cent of GDP in any financial year.

Nacil has a debt of Rs 16,000 crore, of which around Rs 11,000 crore is short-term, high-cost debt. These loans have no sovereign guarantee. With the finance ministry decision, Air India could reduce its interest rates by up to 150 basis points, according to sources. The carrier has been looking to convert its high-cost debt to low-cost to extricate itself from a financial mess.

Air India has losses of over Rs 7,200 crore, and is expected to make further losses of Rs 5,000 crore in FY11.

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.  

The Ministry of Civil Aviation had also requested the government some months ago to provide sovereign guarantees to Air India so that it could reduce the cost of its borrowings and get better terms. However, ministry officials had said that this was unlikely as the government was already infusing equity into the company.

The Centre infused fresh equity of Rs 800 crore into Air India in the last financial year, subject to certain conditions. Despite the fact that Air India was unable to meet many of the targets promised, the infusion went ahead. These included primarily cutting costs by Rs  2,000 crore, including a reduction in employee wages and closing of some offices. But Nacil was able to save only Rs 1,200 crore and failed to push through the wage reduction plan due to stiff opposition from unions.

The government now is awaiting Cabinet approval for another equity infusion of Rs 1,200 crore for FY11. This will increase the equity base of the company to Rs 2,145 crore.

Air India has a domestic marketshare of over 18 per cent — much lower than competitors like Jet and Kingfisher. The carrier ordered 111 aircraft in 2005, of which it has received the delivery of 68. No planes are scheduled for delivery this year.   

The new norms stipulate that sovereign guarantees would be provided for 70-90 per cent of project cost and credit worthiness of the entity to be covered. The remaining cost would be guaranteed by borrowing institutions. As of March 2009, the government had outstanding guarantees of Rs 1.13 lakh crore.