The government recently concluded the second private placement bond offering for the special purpose vehicle (SPV) created to address Air India’s balance sheet woes. This is the second series of the offering. Or more accurately for the redeemable, unsecured, taxable, non-convertible debentures backed by a government guarantee and being referred to as bonds. The offering signals strong intent of the government towards privatising Air India, yet the success of the offering cannot be confused in any manner with any success at Air India.
The SPV is essential to the balance-sheet cleanup at Air India
The bond offering was done on behalf of the SPV named Air India Asset Holdings Limited (AIAHL). This was set up to transfer Rs 29,464 crore of debt from Air India’s balance sheet. Effectively this leads to the national carrier’s debt burden being slashed by 50 percent. This amount in turn will be refinanced and subsequently serviced by the sale of non-core assets.
The SPV in turn will service the bonds by sale of assets. These include shares held in various subsidiaries, paintings, artifacts and other non-operational assets, non-core assets, immovable properties and moveable properties, intangible properties trademarks, brand names, goodwill, copyright, intellectual property rights, accumulated working capital loans not backed by any asset and other assets that may be decided by Air India and/or the Government of India.
Interestingly, the SPV may also hold claim to slots at airports, landing rights and operating rights. But again this has to be jointly decided by Air India and the Government of India. It can be assumed that any assets that the potential buyer is not willing to pay for may be transferred to the SPV.
Details of the bond offerings
The first bond offering in September this year, was priced at 6.99 percent and had a three-year and three month tenure of Rs 1,000 crore. Put simply, this means that the bond pays the buyer at a rate of 6.99 percent semi-annually (twice a year). The 6.99 percent is also of importance as it is higher than the three-year government bond yield and even higher than the 10-year treasury yield at the time of 6.73 percent while being backed by the full faith and credit of the Government of India. It was rated AAA by ICRA ratings.
The second offering was priced at 7.39 percent and had a ten year tenor of Rs 1,000 crore. Yet again this was higher than the 10-year treasury yield of 6.685 percent while being backed by the full faith and credit of the Government of India. It was also rated AAA by ICRA ratings.
Both bond offerings had a greenshoe option of Rs 6,000 crore. Cumulatively the offerings have enabled the SPV to raise Rs 14,000 crore. Additional bond issues are planned, including a Rs 15,064 crore issue that will have a maturity period of ten years.
The bond offerings being oversubscribed is being presented as a runway success. While it was a success, it is also worth repeating that this bond offering is government backed. Which translates to zero risk of default and a high trust factor and high safety for investors. This also allows for the debt in the SPV to be refinanced at a lower rate.
De-hyphenation is critical for investors interested in Air India
Some quarters have been linking the success of the bond offering to the interest in Air India or to the strength of the Air India brand. This is simply not the case.
In fact, as news of the success of the bond offering poured through, it was also reported that there was a mass resignation of first officers at Air India. If that was not bad enough, several oil companies also threatened to stop oil supply at six airports in case lump sum payments were not made by October 18.
Air India Limited and Air India Asset Holdings Limited continue to be two separate entities. In terms of a sale, any buyer that values Air India will use the enterprise value. For this the debt load has to be addressed else the valuation will just not attract investor interest. In creating the SPV the government has signalled seriousness and partially alleviated this concern. But more work remains. The current valuation and contingent liabilities do not lend themselves to a very attractive proposition.
For investors it is important to de-hyphenate the success of the bond offering with any success at Air India. Both are standalone entities and the success of the bond offering has no bearing on any success at Air India. Eventually it is Air India that is being sold and not the SPV. Thus, unwarranted attention on the success of the SPV is just that.
Satyendra Pandey has held a variety of assignments in aviation. He is the former head of strategy at a fast growing airline. Previously he was with the Centre for Aviation (CAPA) where he led the advisory and research teams. Satyendra has been involved in restructuring, scaling and turnarounds. Read his columns