BL Research Bureau

The turmoil in the aviation industry due to the spread of coronavirus has started reflecting on the ratings of debt securities issued by Indian carriers. On March 24, rating agency CRISIL downgraded its rating on the non-convertible debentures (NCDs) of government-owned Air India amounting to ₹700 crore. The rating of these NCDs was downgraded to CRISIL BB+(CE) from CRISIL AAA(CE), and the rating remains on ‘Rating Watch with Negative Implications’. However, the ratings on the remaining NCDs (₹5,500 crore and ₹7,400 crore) of Air India have been reaffirmed by the rating agency at CRISIL AAA(CE)/Stable.

What happened?

The CRISIL rating document says that the NCDs worth ₹700 crore is due to be repaid on March 26, 2020. The NCDs were issued in March 2010 and carry a coupon rate of 9.13 per cent.

IDBI Trusteeship, the trustee for the instrument, had invoked the Government of India (GoI) guarantee on February 6, 2020, and the interest as well as the principal were not funded in the designated account as on March 23, 2020.

Air India’s management has informed CRISIL that they have secured GoI guarantee to facilitate the refinancing of the entire principal amount of ₹700 crore to be repaid against the outstanding NCDs, and that the lender for the same has also been arranged. Besides, the management is also making arrangements for Air India to pay the interest related to the NCDs.

However, given the prevailing market environment due to the outbreak of coronavirus, there could be potential procedural challenges in the timely arrangement of funds. CRISIL could take further rating action in the event of further delays in receipt of funds in the designated account. Once the designated account is funded for the upcoming interest and principal repayments, CRISIL will remove the rating on the ₹700-crore NCD from ‘watch’.

Government guarantee

For arriving at the ratings, CRISIL has applied its criteria for notching up standalone ratings of entities based on government support. Despite the downgrade, CRISIL says that the ratings continue to reflect the strength of the credit enhancement provided by comprehensive, unconditional, and irrevocable guarantees from the GoI, and the trustee-administered payment mechanisms, for Air India’s NCDs.

CRISIL expects that GoI’s guarantees, together with the structured payment mechanism, will ensure that all repayment obligations of Air India are met in a timely manner. The rating agency also says that GoI’s guarantees for all its rated NCDs are expected to remain unaffected by any infirmity or irregularity on the part of Air India to meet any of its obligations. The guarantees will remain unaffected even if Air India is referred to any authority for reconstruction/revival/rehabilitation or for dissolution/insolvency/liquidation/ winding up.

The CRISIL note states that Air India’s standalone liquidity position is sub-par, due to continuing losses from its airline business. But the GoI has been providing the airline constant support through equity infusions and by providing guarantees for borrowings.

The financial risk profile of Air India remains weak due to accumulated losses, high debt levels, and negative net worth and cash accruals, says the CRISIL note. Even as the GoI is looking at the divestment of Air India, continued support to ensure timely debt obligations is nevertheless expected. According to CRISIL, Air India posted a loss of ₹8,520 crore in the year ended March 2019 and its adjusted debt-to-net worth ratio was a negative 2 times.

Reports say that Air India’s operational losses had reduced in the nine months ended December 2019. But the major hit from the coronavirus impact will impact all airlines, globally and in India, including Air India. The Centre had recently postponed the planned disinvestment of Air India due to adverse aviation market conditions on account of the coronavirus spread.

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