IFR-Air India launches INR74bn 19-yr bond sale amid criticism

Last Updated: Sat, Nov 17, 2012 19:11 hrs

SINGAPORE, Nov 16 (IFR) - Air India has launched the first tranche of its INR74bn (USD1.3bn) 19-year bond sale. The INR5bn tranche, launched in the morning, is being placed with the Employees' Provident Fund Organisation (EPFO).

A second tranche of INR3bn, to be launched next week, will be placed with India's largest insurer LIC. The remaining bonds will also be placed with these two state-owned investors over the next couple of days.

The private placement to these two investors has surprised the industry which was waiting for the bond sale for months.

The sale is the biggest ever for the country and an important milestone in Air India's restructuring but it has been pushed back several times since August.

The deferment was because the company was not given an unconditional guarantee by the government.

A guarantee from the government did come on September 18 but it had conditions stipulating the company had to meet certain milestones for its performance every five years.

This conditional guarantee was not acceptable to Air India and bond investors. Subsequently, Air India has obtained unconditional guarantee from the government.

Air India, which has not posted a net profit in the last five years, has maintained that it would not be able to meet any performance milestones in an already competitive industry.

Placing the entire bond sale with state-owned investors has given a certainty of execution to the national carrier, besides offering a cost saving on the coupon. "Private banks will never have offered such a pricing," said a DCM head of a private-sector Indian bank.

Air India will pay a coupon of 9.08% semi-annually on its bonds, according to a source close to the issue.

Aviation Secretary K N Srivastava said yesterday that Air India would save INR1bn a month in interest payments after the bond sale since the bonds would refinance short-term loans.

However, industry experts have criticized the bond sale as worse than a government bailout.

"First, the government gives an unconditional guarantee to an ailing giant and then buys the toxic assets using the pension money of its employees," said another Mumbai-based DCM banker.

Under a INR224.68bn restructuring plan approved for Air India in April, the company was supposed to complete the jumbo bond sale by September 30 to refinance its short-term loans.

Air India bonds are Triple A rated by Crisil and Fitch.

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