Lenders to Air India say converting debt into bonds may be the best possible option, but concerns weigh on their mind over fears about mark-to-market loss (writing down securities to reflect current values).
It requires the central bank’s approval for those bonds to have statutory liquidity ratio (SLR) status. SBI Caps is currently working on the alternatives likely to be agreeable to all banks in the consortium. The proposal would then be taken up with the Reserve Bank of India (RBI) and the government for approval.
A senior official of a bank from the 26-member consortium said the first preference was for SLR bonds where the government guarantees principal and interest.
“If we keep the SLR bonds in the HTM (hold-to-maturity) category, then MTM (mark-to-market) could be avoided,” according to an official from a public sector bank. “However, under the Basel-III norms (that are to come into force over the next few years), all investments will have to be marked to market.”
The next option would be non-convertible debentures (NCDs) guaranteed by the government. “These options would help free liquidity locked in the debt,” says the banker. “But approval from the RBI is crucial.”
However, this is not the first time such options are being explored. Also, bankers fear it did not work quite well in the past. In 2002-03, the regulator had allowed banks to hold non-SLR bonds issued by IFCI in the HTM category to avoid MTM losses. Four years later, banks took a hit of about Rs 700 crore when RBI asked them to transfer their exposure in the non-SLR bonds and debentures back to the available-to-sale category.
Notes a treasury official of a large public sector bank: “There should be uniformity in the approach of central banks. RBI cannot keep shifting goal posts each time.” The government carrier needed a complete revamp. Any capital infusion without it would mean putting money down the drain.The next best option of raising funds via NCDs has its own set of concerns. “Though backed by the government, Air India NCDs may distort the yield curve if they are to be issued at higher coupon rates,” the official adds.
Air India has total debt of around Rs 43,000 crore, of which bank loans worth Rs 22,500 crore will be restructured. Bankers had agreed to the deadline of January 31 for completing the debt recast. Earlier, it was proposed that 60 per cent of the loans be converted into long-term ones to be repaid over 15 years, and the balance be converted into cumulative redeemable preference shares with dividend of eight per cent. The plan, however, was rejected by banks, as it would have hurt its profitability.