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C. Shivkumar

Bangalore, Oct. 28 State Bank of India has insisted that airline companies provide corporate guarantees as a precondition for credit lines.

Top SBI officials said that at least two of the country’s largest private sector airline companies had approached it for credit support.

Currently, only the public sector National Aviation Company, the holding company of Air India, has credit support from the domestic banking sector.

Unlike the public sector, where there was an implicit sovereign guarantee cover and physical asset coverage, private sector had little to offer as collateral, the officials said.

Under current guidelines for borrowers, the prescribed physical asset coverage ratio is 150 per cent of the outstanding credit.

Besides, the bankers said, the airline companies were also not in a position to pledge cash flows.

This was because almost all private sector airline companies largely operate leased fleet. This makes lease financiers the asset owners.

The lessors were entirely cross-border. American International Group subsidiary International Lease Financing Corporation and Ireland-based Ansett Worldwide Aviation Services are among the largest lessors to the large domestic aviation companies – Jet Airways Ltd and Kingfisher.

In most of these lease arrangement, the lessors had the first charge on the aviation companies’ revenues through an escrow accounting mechanism.

Moreover, lease rentals during the last few months have been on the ascent on account of the hardening global interest rates and due to weakening of the rupee against the US dollar.

Most of the lease rentals of the lessees of the aviation operators were denominated in dollar.

Lease rental costs averaged only about 6 per cent in 2004 even after factoring hedging costs.

Currently, with six-month London Inter Bank Offered Rate at 5 per cent, lease rental costs are close to 10 per cent. In addition, the exchange rates have crossed Rs 50 to a dollar.

Consequently after payment of lease rentals, aviation companies had little cash for meeting the additional debt servicing requirements.

Besides, aviation companies were also faced with falling passenger load factors. This essentially left the aviation companies with very little flexibility to hike fares, leaving them cash strapped.

Faced with this kind of a situation, bankers said, aviation companies would have to bring in corporate guarantees or collateral for becoming eligible for domestic bank finance.

Some public sector banks have already indicated their disinclination for having aviation company assets on their books.

This was on account of fears that the assets are likely to face delinquencies and turn into non-performing assets (NPA).

With most banks now shifting to the BASEL II regime, few are keen to have NPAs on their books.

Besides, the bankers said, credit demands from domestic infrastructure, industrial and farm sectors would receive precedence.

Airline companies would come very low on the priority order, they added.

More Stories on : Public Sector Banks | Credit Market | Airlines | State Bank of India

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