Govt puts off debt-laden Air India stake sale, to revive loan recast plan

The attempt to sell 76% in the national carrier failed after not a single bidder evinced an interest in the airline earlier this month

The government has indefinitely put off the sale of state-owned airline Air India as it believes there wouldn’t be takers ahead of the 2019 general elections. The attempt will now be to recast the debt burden of the airline by hiving off a portion of the debt into a separate subsidiary.
 
Sources aware of the development said the call to defer the disinvestment process was taken at a meeting of the group of ministers Monday night. The decision came after the transaction advisor suggested that the political environment was not conducive for a sale of Air India’s magnitude. “If we restart the sale process now, it is unlikely that the process will be completed before the elections are announced. It was felt that investors will be reluctant to participate when the political condition remains uncertain,” said a senior government official involved in the process.

 
The attempt to sell 76 per cent in the national carrier failed after not a single bidder evinced an interest in the airline earlier this month.
 
The government has now revived an earlier attempt to restructure the airline’s debt under a Special Purpose Vehicle (SPV). According to the plan, the working capital loan of Air India will be transferred from the airline’s account books to the SPV while the aircraft-related debt will remain. The government will sell Air India’s non-core assets like real estate and land parcels to pay off the working capital loan.
 
A senior government official said the airline would sell real estate assets in cities, airport locations, and airline offices at prime locations. A consultant will be appointed to make a detailed inventory report of the assets and fix a proper valuation for them. The process will be reviewed by a committee, which will comprise secretary-level officials of the civil aviation ministry and finance ministry, people from Air India, and a retired judge. “With the SPV holding non-aircraft-related debt, this will help to clean up Air India’s books and lighten the debt burden. In this way, the enterprise valuation of the company will go up, making it more attractive for investors whenever the sale process is resumed,” the official said.

 
Of the around Rs 500 billion debt, around Rs 160 billion is on account of aircraft loan, which has been raised partially from EXIM Bank, foreign institutions and via NCDs (non-convertible debentures).  The loan taken for aircraft is through sovereign bonds and is guaranteed by the Government of India. The working capital has come from a consortium of 25 lenders led by State Bank of India.
 
With the changed plans, the government will have to restart the equity infusion process so that Air India can continue as a going concern.

 
With an annual interest outgo of Rs 40 billion, the airline officials said that there was an immediate requirement to infuse Rs 30 billion into the company. “Government has to resume equity infusion for providing money for the annual interest payment.
 
On top of that, we will need around Rs 10 billion for day to day operation,” a senior Air India official said. Experts, however, warned that continued government ownership with the state subsidising large-scale losses of the airline was not a viable idea. “We are disappointed with the decision not to go ahead with AI's divestment. There will never be a perfect timing for AI divestment as conditions for divestment have to be structured by some bold decisions. Funding large-scale losses is grossly unfair to the tax payer,” said Kapil Kaul, CEO (South Asia) of aviation consultancy firm CAPA.