Risky flight plan

AI's bond market plan does not address core concerns

The government’s reported plan to raise Rs 22,000 crore for Air India via the bond market is fraught with risks. The broad objective of this big-bang fund-raising exercise is to help the state-owned carrier improve its financials ahead of a second attempt to sell the airline. The loss-making airline owes foreign and Indian lenders Rs 58,000 crore, and this amount, which will be raised in two tranches of Rs 7,000 crore and Rs 15,000 crore, will be used to part-pay creditors without resorting to financing via the Government of India’s Budget.
 
Three issues raise doubts about the wisdom of the move. First, since prospective investors are unlikely to display any appetite for the bonds of a company with accumulated losses of Rs 53,584 crore, the government has decided to offer a sovereign guarantee for them. The experience with Enron Corporation in the 1990s remains a cautionary tale of the risks of sovereign guarantees. Underwriting the debt of this deeply indebted airline, which remains on shaky ground despite multiple restructurings, is also a precarious business. Will an airline that saw net losses jump 58 per cent in FY18 over FY17 be in a position to service these bonds? Indeed, at a time when other airlines are soaring on Jet Airways’ departure, Air India has been unable to cash in: 15 of its aircraft have been grounded for lack of spares because the airline has not paid its vendors.

 
Second, the Indian bond markets, notoriously shallow, have not been in great shape since the mega-defaults by IL&FS and other shadow banks. To get round the problem of under-subscription, the government has indicated that it will resort to the age-old practice of inducing Life Insurance Corporation (LIC) and the Employees’ Provident Fund Organisation (EPFO) to subscribe to these bonds. Since both these institutions are state-owned and run on public funds, this would be akin to public sector ONGC’s investment in another public sector oil marketing company HPCL, and other similar deals that helped the National Democratic Alliance government register healthy disinvestment proceeds in FY19. Such circular arrangements between the government and entities it controls may only solve the immediate cash problem of Air India. Three, the finance ministry has asked the airline to raise the repayment amount through sale of assets and subsidiaries. But Air India has been trying to sell some of its subsidiaries for a very long time, without any success.

 

To be sure, having learnt from last summer’s no-show privatisation, the government is said to be moving swiftly to improve the terms when it puts Air India on the block again. It has proposed to ease rules to allow share sale by a buyer without a restriction on the time period (as opposed to a three-year lock-in the earlier exercise); allow a merger or reverse merger with the buyer’s existing business; and enable sale and leaseback of aircraft so that the new owner can raise capital. In addition, the government will no longer hold any residual stake — the single biggest deterrent for prospective investors. But these terms, though attractive, do not address the deeper structural issues embedded in the airline’s functioning that any prospective buyer would consider. The government may discover that, at best, they only postpone the inevitable.