Air India begins sounding LIC and mutual funds for bond sale

Government-owned Air India, which is to issue non-convertible debentures (NCDs) to raise funds for repaying its debt mountain, has begun informally sounding Life Insurance Corporation (LIC) of India, mutual fund houses and government-owned non-life insurance companies to subscribe to the issue, bankers said.

Permission from a group of ministers came yesterday for the NCD issue, as part of a debt recast plan; it has still to be approved by the Cabinet.

The NCDs are, goes the proposal, to be guaranteed by the government and aimed to raise Rs 7,400 crore. They’d have a 20-year maturity and carry a slightly higher coupon rate than comparable government securities.

At present, the yield on government bonds maturing in 2030 is 8.55 per cent, according to Clearing Corporation of India data.

Sources said AI and merchant bankers to the issue would make a detailed presentation to prospective investors within the next few days. “We are yet to receive any formal proposal from Air India, but we will look into it. Since AI bonds will be government-guaranteed, these will be safe investments,” said a top LIC official.

Funds won’t be a problem for the insurance behemoth and it has plans to invest Rs 80,000 crore in debt and equities during the January-March period of the current financial year.

Of this, Rs 60,000-75,000 crore would be invested in debt instruments, with the rest to equities. So far during 2011-12, the largest life insurer in the country has invested Rs 1.15 lakh crore, of which Rs 25,000 crore was in equities.

Of around Rs 90,000 crore debt investments, a large part has gone to government securities and 25-30 per cent in corporate instruments. In 2010-11, LIC invested Rs 1.95 lakh crore, of which Rs 43,000 crore was in equities.

Of total AI debt of Rs 43,000 crore, as much as Rs 22,500 crore was proposed for restructuring. While Air India will pay back Rs 7,400 crore to banks, the remaining amount will be converted into long-term loans, with an interest rate of 11 per cent.

Due to the recast, banks have to make a provision of around Rs 2,000 crore. A consortium of 26 banks, including Punjab National Bank, Bank of Baroda and Central Bank of India, with State Bank of India as the lead institution, have exposure to the troubled carrier.

The Reserve Bank of India has said the restructuring should be completed by March 20, failing which banks have to classify the exposure as a non-performing asset.

Source: Business Standard