The Hindu Business Line : Banks unlikely to extend credit support to airlines

The bankers said that since most of the private sector aviation companies have large overdues to the oil companies, credit worthiness was an issue. The overdues to the oil companies amount to about Rs 2,000 crore.

Almost all the private sector aviation companies had approached the banks for support for meeting their working capital requirements. The companies are strapped for cash in the face of mounting lease rentals and falling passenger loads. The largest lessor to the domestic aviation companies is the American International Group subsidiary, International Lease Financing Corporation. Most of the aircraft leases range anywhere between 10 and 15 years.

One of the major problems with lease rentals is that they are linked to the six-month London Inter Bank Offered Rate (LIBOR) at spreads of about 200 basis points. Bankers said that most of the aviation leases were in the form leveraged leases. Leveraged leases implied that the leasing company raised debts for financing the acquisition of the aircraft for leasing to the aviation operators. Consequently, the lease rentals were decided on the basis of the creditworthiness of the borrowers.

Hardening Libor

One major factor that led to escalation in lease rental costs was the hardening of LIBOR, although the spreads have remained constant. Six-month LIBOR in 2004, when the aviation companies had entered into leases, were less than 2 per cent. In addition, the lessees — the aviation companies — also had the advantage of favourable exchange rates.

The rupee-dollar exchange rate averaged Rs 44.89. Consequently, the aviation companies were able to obtain favourable leasing terms from the global lessors. Lease rental costs averaged only about 6 per cent even after factoring hedging costs then.

However, the situation currently has since completely reversed. Airlines have been hit, since earnings are in rupees, but lease payouts are in dollars. Six-month LIBOR is currently about 5 per cent. Even assuming that the old spread continued, the costs are currently close to about 8 per cent. The rupee-dollar exchange rates are also down to Rs 49.

As a result, inclusive of hedging costs, the rentals are over 10 per cent. Bankers said that some of the aviation companies had approached them for short-term financing arrangements.

DSCR

However, given the current situation, none of the aviation companies would be in a position to meet the minimum prescribed debt service coverage ratio (DSCR), they said. Banks normally insist on a DSCR of about 1.25 times. This ratio implies the ability of borrowers to meet debt service payments.

Bankers said, “Given the current state of affairs of the aviation companies, it is doubtful whether they will be in a position to comply with DSCR.” Consequently, they said that for any funding requirements, the aviation companies would have to bring in group company corporate guarantees as a credit enhancement measure.

Besides, a top public sector banker said, “Aviation companies do not fall in the definition of infrastructure or priority sector. They can look at cross-border sources.”

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