AI raises $1.4 bn at sub-Libor rates to fund aircraft deal

MUMBAI: Air India has just concluded an aircraft financing deal to raise $1.4 billion (about Rs 5,600 crore) at a rate below the Libor (London inter-bank offered rate). The deal has been clinched through two special purpose vehicles set up in the United States and Ireland to benefit from lower tax rates.

Most commercial transactions globally are at rates above the Libor — even major Indian banks have recently borrowed from US banks at rates much above the Libor. Air India has benefited from dealing with the US Ex-Im, which offers finer rates for Boeing customers.

Unlike its last transaction when Air India borrowed $500 million to buy four aircraft, the airline major has also managed to obtain a sovereign guarantee from the government. The guarantee has come at a cost, as a fee of 0.5% per annum is being paid to the government of India.

Of the total amount raised, the US Ex-Im has guaranteed about $1.2 billion, and $200 million has been raised on commercial borrowings from the State Bank of India and ICICI. The commercial part has been raised at rates above the Libor, it is learnt.

“The airline has been able to get the finest rates for the transaction and is likely to get a further reduction in the exposure fee once India signs the Cape Town Treaty,” said S Venkat, AI’s executive director (finance). The Cape Town Treaty is an international agreement that aims at creating consistency in cross-border financing and leasing of high-value mobile equipment like aircraft. The Indian carrier has paid a 3% exposure fee to the US Ex-Im, which could come down by 1% when India becomes a signatory.

The deal has been structured so that a Delaware-based SPV will acquire the aircraft as well as be the actual borrower. This company will then lease it to an Ireland-based SPV. Air India and Air India Charters — which operates Air India Express — will sub-lease the planes from the Irish company.

India has a double taxation avoidance treaty with Ireland which helps Air India reduce tax on the lease payment. The Ex-Im loan, supported by ABN Amro, is for 12 years and will be used to fund the acquisition of 17 planes. Air India sources said 14 of these have already been inducted, based on (more expensive) bridge financing that will now be repaid.

Meanwhile, the national carrier is now in the middle of raising its next round of funding to pay for 17 more planes that will be delivered from January next year. It has received bids in response to its tender to raise about $1.4 billion.

Some of the offers are for funding without an Ex-Im guarantee. Interestingly, Air India is planning to raise the second tranche without a sovereign guarantee, as this would reduce its borrowing cost. In such a case, the asset itself could be used as a collateral and hypothecated to the bank.