Government-owned Air India’s debt restructuring proposal was cleared by the Group of Ministers (GoM) on the issue on Tuesday. The Cabinet has to now approve this.
Banks are restructuring around Rs 18,000 crore of the Rs 24,000 crore short-term debt of the carrier. AI will issue non-convertible debentures (NCD) to raise Rs 7,400 crore and use the money to repay a part of its short-term debt. The rest will be converted into long-term debt, to be repaid in 10-15 years, at an interest rate of 11 per cent. The bond will have a government guarantee and a maturity period of 20 years. The coupon rate will be slightly above that for government securities, said a senior AI official.
“The banks were to convert a part of our debt into equity. We will repay (part of) our debt with the money raised through bonds and the banks will not have to take a major hit. Around 15 banks will have to make a provision of around Rs 2,160 crore over a period of 20 quarters,” said a senior AI official.
| THE LONG ROAD |
| April 2011: SBI Caps proposes a turnaround and debt restructuring plan for Air India which includes conversion of debt into preference shares |
| June: Air India submits the plan to Group of Ministers (GoM) for approval after getting comments from lenders |
| July: Group of Secretaries set up to examine the turnaround and debt restructuring plan |
| Oct: GoM approves plan after certain modifications and revision of targets for AI |
| Nov: RBI gives in-principle clearance to debt restructuring |
| Jan 2012: RBI approves the debt restructuring plan * Banks oppose conversion of debt to preference shares * Banks examine alternatives such as issue of SLR bonds instead of preference shares. RBI says no to SLR bonds |
The restructuring had hit a hurdle after banks refused to convert a part of the short-term debt into preference shares. According to the earlier plan, they were to restructure Rs 18,000 crore of the Rs 24,000 crore short-term debt. Of this amount, banks will convert Rs 11,000 crore to long-term debt with a repayment of 10 to 15 years. They will convert the remainder, around Rs 7,000 crore, into cumulative redeemable preference shares.
| How the maths will work out |
| * Out of Air India's short-term debt of Rs 22,000 crore, Rs 18,000 were to be restructured |
| * Banks earlier agreed to convert Rs 10,500 crore to long-term debt and the rest into equity |
| * Later, banks refused to convert debt into equity, as the government did not allow them representation on the board |
| * With the bond issue, AI will raise Rs 7,500 crore and repay the banks. The issue will have a maturity period of 20 years and priced at above Gsec rates; it will have a government guarantee |
A senior civil aviation ministry official said with the bond issue, the banks concern had been addressed. “The banks had issues with converting debt into equity and meetings were on to resolve it. Bond issue was one of the option GoM had and they accepted it,” he said. AI has Rs 43,000 crore of debt on its books— Rs 20,000 crore on aircraft loans, and Rs 24,000 crore working capital loans or short-term debt — and accumulated losses of Rs 20,000 crore. The aircraft loans have a long repayment period and are less of a cause of worry.
As the banks have to convert about Rs 10,600 crore of short-term loans into long-term ones, they will have to make additional provisioning. Any loan which is restructured, even if continues to be a standard asset, carries a provisioning requirement of two per cent as compared to the 0.4 per cent for standard assets. In addition, since the interest rate will be lower and repayment period higher, banks have to provide for the loss in the net present value. Since the provisioning requirement will be substantial, the Reserve Bank of India had indicated it would allow banks to make the provision over a period of time instead of making it all in one quarter. Banks are likely to request RBI to allow them for spreading the provisions over 60 quarters.
