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As the government preps Air India for divestment, a key element of the plan is the reduction of the debt burden. The goal is to make the airline a better proposition for buyers. The debt reduction has been carried out by creating a special purpose vehicle (SPV) named Air India Asset Holdings Ltd (AIAHL) and moving half of the debt from the airline balance sheet. Accordingly, 26,500 crores of debt has been moved to the SPV and will be financed via debt issuance and subsequently via asset sales.
Why issue bonds in the first place?
Bonds are simply loans given to a company by investors. Depending on the nature of the bond the investors can be retail investors (individual investors) or institutional investors (banks, mutual funds, pension funds etc). Bonds also represent a “less risky” proposition for investors as in the event of a default bond-holders get paid prior to the equity holders. Where the bond is guaranteed by the government, the risk of default becomes zero.
In the case of the Air India SPV, issuing equity made no sense. Because given the options in the market, investors would simply not opt for buying equity in a SPV that holds Air India debt. Thus issuing debt was the option. The challenge was to reduce the risk so as to make it attractive for investors. This was done by the bonds being fully backed by the government.
Details of the bond issue
The AIAHL bond was priced at 6.99% and had a three-year tenure of ₹1,000 crore. What this means is that the bond pays the buyer at a rate of 6.99% semi-annually (twice a year). The 6.99% 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 6.73%.
The bond had a greenshoe option of ₹6,000 crore. This only means that the underwriter has the option to sell more securities than initially planned if there was demand. And in this case there was demand. Thus, a total of 7000 crores was raised. Among the top three subscribers were ICICI Bank, Trust Capital and State Bank of India (SBI). Each bought in excess of 1000 crores worth of bonds.
Additional bond issues are planned, including a Rs. 15,000 crore issue although that will have a maturity period of ten years.
Why was the reaction so positive?
The bond offering was oversubscribed and 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 thus to a high trust factor. This also allows for the debt in the SPV to be refinanced at a lower rate.
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 also holds claim to slots at airports, landing rights and operating rights. How this will play out is a matter of debate.
Any buyer that values Air India will use a metric called enterprise value which is the sum of the equity value plus debt less any cash/ cash equivalents. In creating the SPV and doing a successful bond offering, the government has signaled seriousness and also made Air India a comparatively better proposition. But it must be noted that it is Air India that is being sold and not the SPV. Thus, unwarranted attention on the success of the SPV is just that.
Overall, the bond issue is indicative of the government intent of divesting Air India.
