The government is likely to transfer about INR 20,000 crore of additional debt from Air India’s books in order to make it lucrative for buyers. The move will leave Air India with about INR 10,000 crore of debt. This is a third of INR 33,992 crore debt that was to be passed on to the new owner during last year’s failed disinvestment process.
Potential bidders had expressed inability to take over the debt laden airline. As of March 31, Air India had a debt of INR 58,351 crore. While the Air India Alternative Special Mechanism (AIASM) headed by Home Minister Amit Shah is yet to take call on it, it has been proposed to the ministerial group that the move is necessary to make it attractive for buyers. Transaction advisor EY has pointed out high debt as one of the reason why investors didn’t show any interest to acquire the airline last year. Further, the argument is that the yearly expenditure to run Air India is more expensive for the government than to pay annual interest on a debt of INR 50,000 crore. The government has already invested INR 30,000 crore under a bailout package extended by the previous UPA regime in 2012 for 10 years.
The government has already transferred INR 29,500 crore of debt to the special purpose vehicle Air India Asset Holding Limited (AIAHL). In order to clear that debt, the SPV has already raised INR 14,000 crore from bond market. It will further raise about INR 8,000 crore through a government guaranteed bond issue over the course of the week. The deal becomes more lucrative as most of the the debt is backed by assets like aircraft that Air India owns. Around INR 8,000 crore is on account of finance lease of aircraft. Finance leasing is one of the lucrative forms of aircraft financing, under which the lessee receives substantially all rights of ownership. Aircraft taken under finance lease are considered to be an asset of the company in contrast to an operating lease, which affects the company’s cash flow. Also, finance lease can be terminated to get out of the liability and thus the debt on which a buyer has to pay interest comes down.
This will include the current liabilities and a portion of working capital which is very common on any merger and acquisition. This is a fairly clean slate for an airline of Air India’s size and potential, said a person involved in the sale process. Air India owns 32 aircraft, and has 37 aircraft on finance lease, while its subsidiary Air India Express which will also be sold along with Air India owns 17 aircraft on Finance lease as on 2018-19.