Banks, aircraft lessors serve default notices on debt-laden Air India

Of the Rs 18 billion committed to Air India in 2017-18, only Rs 6.5 billion has been released
Air India has started defaulting on government-guaranteed loans to lenders and aircraft lessors, setting off alarm bells over the national carrier’s state of finances and credit-worthiness. This is adding to the stress of the airline as it has failed to earn enough profit to cover the interest payment on its Rs 466.69 billion debt.

The situation has turned even more precarious as the government, the owner of Air India, remains non-committal on infusing cash into the company after a failed privatisation process recently. Of the Rs 18 billion committed to Air India in 2017-18, only Rs 6.5 billion has been released and the Union finance ministry is yet to decide on Air India’s repeated demands for an immediate requirement of Rs 31 billion. 

Sources said that over the last few weeks, three banks and two aircraft leasing firms have issued default notices to the airline and have threatened to take legal recourse if dues are not cleared. According to a communication reviewed by Business Standard, San Francisco-based Wells Fargo Trust Services has served a letter of demand notice to Air India, saying that an ‘event of default’ has occurred as the airline has not paid lease rental payments for over two months on three Boeing 787 Dreamliner aircraft.

The United Arab Emirates’ state-owned Dubai Aerospace Enterprise has served a similar notice to Air India’s regional arm Alliance Air for pending rental payments on four ATR 72 aircraft. The outstanding payment amounts to more than $10 million.

In response to queries sent by Business Standard, Wells Fargo said the ‘event of default’ notice was sent as the entity was a trustee for the lenders for the aircraft. “As trustee, we are required to administer the trust as per the terms of the agreement and at the direction of lenders.  Wells Fargo issued the ‘event of default’ notice in its capacity as trustee, not in its individual capacity, and at the direction of lenders,” Beth Richek, vice-president, Well Fargo Corporate Communications, said in an emailed response.

“Such a notice gives the aggrieved party the right to terminate the agreement should the dues not be cleared within the specified time,” said Nitin Sarin, managing partner at law firm Sarin & Co., terming it a very serious matter. “Before a lessor or financer calls out such a notice, it is safe to assume that they have tried all other amicable options to have the default rectified. There is no reason why an airline running on taxpayer’s money should not adhere to its obligations,” he added.
Air India on its part has expressed helplessness, saying that dues can be cleared only when there is a fund infusion by the government. “Wait till the end of August. The government will give us money and then we will pay you. Please do not take any legal action has been the national carrier’s response,” said an executive working for one of the lenders.

Three lenders from the 22-bank consortium have also written to the airline, thereby raising concerns about the airline turning into a non-performing asset (NPA), according to sources. “Standard Chartered Bank, Dena Bank, and Bank of India have raised concerns over outstanding interest payment of more than Rs 8 billion for the last two months,” said a person aware of the matter.

If a company fails to pay instalment (principal and interest) for three consecutive months, lenders have the right to classify the loan as NPA. Standard Chartered, which has the largest exposure of around Rs 16.8 million to Air India, refused to comment on whether it has classified the amount as NPA.

“Pressure has mounted on banks after the February circular of the Reserve Bank of India (RBI) making identification of stressed accounts more stringent. Lenders are now worried and are frequently enquiring about the payment,” said an Air India official. The RBI circular had said that banks would have to disclose defaults even if the interest repayment was overdue by just one day and that they must have a resolution plan in place within 180 days.

For long, the security of government guarantee has helped Air India raise money from banks at a cheap rate. But multiple defaults may change things. Rating agency India Ratings & Research has reaffirmed AAA(SO)/stable for Air India’s debentures as it feels a government guarantee will ensure that all repayment obligations of the company are met in a timely manner. However, it added a note of caution that failure to meet the obligation could lead to a negative rating in future. “Banks are now wary of extending their credit line and the company is struggling to raise working capital for immediate needs,” an airline official said.

Yet, government funding the airline cannot be a solution, argued experts. “Funding large-scale losses is grossly unfair to the taxpayer. Continuing government ownership and with no clear road map will lead the airline to extreme insignificance and possibly closure,” said Kapil Kaul, chief executive officer, South Asia, at aviation consultancy firm CAPA.

Government officials admit that the government indecision on funding Air India is hurting the airline’s prospects. They also believe that the upcoming elections may prevent the government from taking any major decision. “There are two options on the table. Restructure Air India’s debt for which the government has to commit significant budgetary support to pay the banks. Or, take Air India to closure through the insolvency process. Both the decisions can turn out to be extremely unpopular,” a senior government official pointed out.

So what is the plan then? The official offered a counter-question. “Did (Winston) Churchill have a plan?”