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Journalism of Courage
Having exhausted the Rs 2,000-crore sovereign guarantee to raise loans, Air India has resorted to novel ideas to raise $45 million to finance the purchase of five CFM 56-5B engines for its Airbus A320 aircraft.
To support the loans, Air India, in its bid document seeking interest from financial institutions to finance its purchase, has offered three of the newer generation CFM Leap 1-A engines that power its Airbus A320neo fleet as collateral. Interestingly, one of these three new engines is yet to be delivered to the airline.
The government’s last backing to Air India’s debt that allowed it to raise sovereign guaranteed loans of Rs 2,000 crore ended with a Rs 500 crore loan that the airline raised last year. Also, in August, Air India had raised Rs 1,500 crore from domestic bankers under a sovereign guarantee to service existing loans and dues of international vendors, including leasing companies.
Following Air India’s failed disinvestment bid last year, even as the government said it remained firm on the airline’s strategic stake sale, paucity of funds at the airline to meet operational requirements such as servicing of aircraft of funding new purchases could impact the carrier’s value when it goes under the hammer again. Notably, though, like the airline, the government has also resorted to novel methods of providing funds to the airline including reaching in to the National Small Savings Fund to inject funds into the debt-laden carrier.
A senior civil aviation ministry had earlier said that while the Centre would not be extending the government guarantee for Air India’s future loans given that it was looking to disinvest its stake in the airline, the Centre would make equity infusion in the airline to ensure that value erosion does not take place.
In 2012, the government had approved Air India’s turnaround plan, along with a financial restructuring plan for the national carrier.
It included converting about Rs 11,000 crore of the airline’s working capital debt into long-term loans with a consortium of 19 banks, which has to be repaid by the carrier by 2021. Last year, it underwent an unsuccessful disinvestment attempt by the government, wherein the Centre had offered to sell 76 per cent of its stake in the airline to a strategic investor.
In the tender document issued by the carrier seeking to raise funds for its purchase of CFM 56-5B engines, Air India said that each of the power plants will require an estimated loan amount of $9 million and it expected delivery of two units of the equipment in May, followed by one each in June, July, and August.
Under the collateral offered heading of the tender document, the airline said: “Mortgage over the three Air India-owned new CFM Leap 1- 26A engines with indicated total new engines value of about $50 million (average value $16.7 million each engine)…two of these engines already delivered and owned by Air India, the third engine is expected to be delivered during May/June 2019.”
“The loan offers should be structured based on minimum collateral of one CFM Leap 1-26A Engine valued at approximately $16.7 million as no physical sub-division of such collateral security is feasible,” it added.
In 2017, too, Air India picked up bridge loans worth up to $740 million to finance its purchase of six Boeing 787 aircraft. While the loans were sovereign backed, the airline had offered the aircraft as collateral.
