Air India Seeks Bailout as Jet Eyes Dollar Debt: India Credit

Air India Seeks Bailout as Jet Eyes Dollar Debt
State-owned Air India Ltd. has asked for 65 billion rupees ($1.3 billion) in federal aid. Photographer: Namas Bhojani/Bloomberg

India’s biggest airlines are turning to the government and international credit markets to reorganize $13 billion of debt after benchmark bond yields in Asia’s third-largest economy surged to a three-year high.

State-owned Air India Ltd. has asked for 65 billion rupees ($1.3 billion) in federal aid and won an agreement with lenders to cut annual interest payments by 13 billion rupees, according to three people familiar with the talks. Kingfisher Airlines Ltd. is seeking government help for a debt revamp, Aviation Minister Vayalar Ravi said in New Delhi on Nov. 11. Jet Airways (India) Ltd., the biggest carrier, said it is looking to convert rupee-denominated loans into cheaper dollar debt.

The combination of seven benchmark interest-rate increases and a 30 percent jump in jet-fuel costs this year is widening losses, with low-cost carrier IndiGo the nation’s only profitable airline. Five-year borrowing costs for AAA rated companies surged 84 basis points in 2011 to 9.78 percent yesterday, while similar yields fell two basis points to 4.88 percent in China.

“The time has come for Indian carriers, both private and public, to place an equal emphasis on easing debt burdens and driving operating efficiencies,” Srisu Subrahmanyam, co-founder of the Chicago-based Orchard Group that advises airlines on cost-cutting, said in an interview on Nov. 12. “Some carriers are burdened by high debt loads and have to focus on cutting costs, not just for profitability, but survival.”

Cash Shortage

Indian airlines have failed to turn this year’s 19 percent jump in passenger numbers into profits because of a price war, taxes on fuel that average about 25 percent and an 11.3 percent slide in the rupee versus the dollar.

Mounting losses mean local airlines need about $2.5 billion of new cash to maintain operations, including $1.32 billion for Air India, according to the Sydney-based CAPA Centre for Aviation, an industry consultant. Kingfisher, controlled by billionaire brewing tycoon Vijay Mallya, needs a total of $400 million in the next three months, CAPA said.

Kingfisher more than doubled its second-quarter loss to 4.69 billion rupees as fuel costs rose 71 percent in the period, the company said in a statement today. Jet Airways reported a wider-than-expected 7.14 billion-rupee loss for last quarter after a 50 percent jump in its fuel bill and a 2.76 billion-rupee loss from currency swings.

SpiceJet -- controlled by billionaire Kalanithi Maran, who built a $2.5 billion fortune after founding Sun TV Network Ltd. -- lost 2.4 billion rupees in the same period, compared with earnings of 101.1 million rupees a year earlier. Air India, unprofitable for four years, has taken 32 billion rupees in government handouts since April 2009 to stay in business.

‘Very Fragile’

“We have a serious issue on hand and that is to address the viability of Indian carriers,” Kapil Kaul, CAPA’s New Delhi-based chief executive officer for South Asia, said in an interview on Nov. 13. The financial status of domestic carriers is “very fragile,” he said.

Yields on Air India’s 9.13 percent bonds due in March 2020 rose 39 basis points, or 0.39 percentage point, this quarter to 9.20 percent, the most since February, according to prices from the Fixed Income Money Market and Derivatives Association of India. Yields on 2017 dollar-denominated bonds of Gol Linhas Aereas Inteligentes SA, Brazil’s second-largest airline, dropped to 9.05 percent from 11.10 percent.

The Reserve Bank of India raised its repurchase rate by 225 basis points in 2011 to a three-year high of 8.5 percent. The increases helped boost 10-year government bond yields by 102 basis points, the most after Vietnam among Asia’s local-currency debt markets, data compiled by Bloomberg show. The yield on the 8.79 percent securities due in November 2021 fell three basis points to 8.94 percent today.

Default Swaps

The extra yield demanded on Indian bonds over similar-dated U.S. debt climbed 231 basis points in 2011 to 694 basis points. Rupee sovereign notes returned 1.9 percent this year, while Indonesian debt earned 19.6 percent in the region’s best performance, indexes compiled by HSBC Holdings Plc show.

The average cost for credit-default swaps insuring against non-payment on the debt of eight Indian issuers has climbed 168 basis points this year to 367 basis points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets.

The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a nation or company fail to adhere to its debt agreements.

Mumbai-based Air India’s interest costs will decline to about 21 billion rupees a year from 34 billion rupees after its debt-revamp deal with lenders, according to the three people familiar with the matter who declined to be identified before a ministerial panel ratifies the accord.

Loan Conversions

The airline also plans to convert about 110 billion rupees of short-terms loans into 15-year debt at a rate of 11.5 percent per year, the people said. About 70 billion rupees of loans will be swapped for cumulative preferred shares, redeemable in 15 years and carrying an 8.5 percent interest rate.

Jet Airways has converted into dollars more than 94 percent of the 85 billion rupees of loans used to fund aircraft purchases, M. Shivkumar, the senior vice president of finance, said yesterday on a conference call. The Mumbai-based airline, which spent 50 percent more on fuel last quarter than a year earlier, plans to sell and lease back some of its planes to repay high-cost working capital loans, according to a Nov. 11 statement.

Kingfisher has asked banks to increase lending limits for the company and cut flights to 300 a day from 340 as it reconfigures planes and stops offering discount services as part of a turnaround plan, the carrier said in a Nov. 11 statement. The Bangalore-based airline has a 14.8 billion rupee revolver loan that allows funds to be re-borrowed once they have been repaid maturing in January and a 60 billion rupee term loan due in 2019, according to Bloomberg data. Kingfisher doesn’t have any bonds.

‘Cash Infusion’

“Kingfisher can still be turned around if the necessary cash infusion is forthcoming,” Binit Somaia, a Sydney-based director at CAPA, said in an interview on Nov. 11. “It is far preferable for all stakeholders if the airline can be assisted during this difficult period, than to see it fail.”

Prime Minister Manmohan Singh said on Nov. 12 that the government may help Kingfisher, according to the Press Trust of India. The Finance Ministry may ask lenders to help the carrier recast debt and the Oil Ministry may extend credit for fuel to airlines, Aviation Minister Ravi said last week.

“In India, airlines are over taxed and over charged,” Mallya, Kingfisher’s chairman and managing director, wrote on his Twitter account last week. The company confirmed it was his feed. Mallya, 55, was unavailable to comment when called on Nov. 13.

Sliding Rupee

The slump in the rupee, Asia’s worst-performing currency this year, has increased the cost of airplanes ordered from overseas. Jet-fuel prices have risen about 30 percent in Mumbai since Jan. 1, excluding tax, according to the website of Indian Oil Corp., the nation’s biggest refiner. The Indian currency slid 0.6 percent to 50.59 per dollar today, taking losses this year to 11.7 percent.

“Almost every airline needs funds,” D.S. Rawat, New Delhi-based secretary general of the Associated Chambers of Commerce & Industry of India, said on Nov. 12. “There will be a question mark on their survival if they aren’t able to raise them.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE