NEW DELHI: The government is likely to provide a guarantee or a comfort letter to National Aviation Company of India (Nacil) that will help the beleaguered public sector airline access funds at 10-10.5% under a debt restructuring programme that is under negotiation.
A government official said the finance ministry would discuss the issue of guarantee once there was agreement on the final contours of debt restructuring. In other words, North Block wants to do a proper due-diligence before providing the comfort letter as there is a feeling in official circles that the civil aviation ministry often limits itself to sectoral interests.
While Nacil, which flies on domestic and international routes under the Air India brand, was demanding single-digit rates, under the base rate regime the interest rate on a bulk of the airline's loan is expected to be 50-100 basis points (100 basis points make a percentage point) higher than the benchmark rate. "With a government guarantee, we can offer loans to Air India at 50-100 basis points above base rate since we need to factor in the costs and some element of risk," a bank chief told TOI.
Lenders to Nacil such as SBI and ICICI Bank have revised their base rates to 9.25%, while Bank of Baroda and IDBI Bank are at 10%. Bankers said that at present, bulk of the loans are around 12.5% and a reduction will result in savings of around 200 basis points, leading to annual interest savings of around Rs 800 crore. In case of another substantial chunk, lenders have agreed to lower the cost as they were raised overseas and banks are in a position to avail of cheaper rates.
But for the debt restructuring to fructify, two crucial gaps need to be filled. One, the lenders are yet to agree with the projections made by the Air India management. Two, banks are not willing to pay any premium on converting debt into equity and have not agreed on the instrument of conversion. Nacil wants equity loans converted into preference shares, which carry a fixed rate of dividend and repayment of capital in case of winding up. There is, however, going to be urgency on Air India's part to push for loan restructuring as it has defaulted on interest payment to certain lenders. In any case, the finance ministry wants the airline to first restructure its debt before seeking more funds.
A government official said the finance ministry would discuss the issue of guarantee once there was agreement on the final contours of debt restructuring. In other words, North Block wants to do a proper due-diligence before providing the comfort letter as there is a feeling in official circles that the civil aviation ministry often limits itself to sectoral interests.
While Nacil, which flies on domestic and international routes under the Air India brand, was demanding single-digit rates, under the base rate regime the interest rate on a bulk of the airline's loan is expected to be 50-100 basis points (100 basis points make a percentage point) higher than the benchmark rate. "With a government guarantee, we can offer loans to Air India at 50-100 basis points above base rate since we need to factor in the costs and some element of risk," a bank chief told TOI.
Lenders to Nacil such as SBI and ICICI Bank have revised their base rates to 9.25%, while Bank of Baroda and IDBI Bank are at 10%. Bankers said that at present, bulk of the loans are around 12.5% and a reduction will result in savings of around 200 basis points, leading to annual interest savings of around Rs 800 crore. In case of another substantial chunk, lenders have agreed to lower the cost as they were raised overseas and banks are in a position to avail of cheaper rates.
But for the debt restructuring to fructify, two crucial gaps need to be filled. One, the lenders are yet to agree with the projections made by the Air India management. Two, banks are not willing to pay any premium on converting debt into equity and have not agreed on the instrument of conversion. Nacil wants equity loans converted into preference shares, which carry a fixed rate of dividend and repayment of capital in case of winding up. There is, however, going to be urgency on Air India's part to push for loan restructuring as it has defaulted on interest payment to certain lenders. In any case, the finance ministry wants the airline to first restructure its debt before seeking more funds.
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