Tata is offering to raise an unrated, unsecured, general purpose loan from Air India’s existing lenders at an annual interest rate of 4-5%, the people said.
“Almost all of Air India’s existing lenders are keen to provide loans to Tata, especially in the absence of credit growth, but pricing is a hurdle they have to overcome,” said an executive at one of the lenders. The new debt will replace the credit previously raised by Air India at 9-10%, the people said. Tata Sons did not respond to questions. Talace made the winning bid for Air India, which is being privatized. The acquisition takes effect at the end of the month.
Banks will need to pass a special resolution for pricing unrated and unsecured loans at quasi-sovereign rates. Most banks have a policy of pricing unrated and unsecured loans above the marginal cost of the fund lending rate (MCLR).
Likely agreement before Christmas
Most banks have MCLRs above 7%. The one-year MCLR of the State Bank of India, the country’s largest bank, is the lowest at 7% while the second bank, ICICI Bank, pegged it at 7.25%.
Banks give loans below the MCLR as long as it is a triple A rated borrower and the loan is secured, the lender cited above said. These loans are grossed up against treasury bills or the repo rate, he said. The final yield point for one-year treasury bills is 4.149% while the reverse repo rate is 4%.
“The dilemma is because short-term rates are expected to tighten, with the Reserve Bank of India (RBI) reducing excess liquidity in the system to normalize post-pandemic easing, but at the same time demand lending is sluggish, ”the executive said. noted. “But the banks keen to finance Tata will pass a special resolution to lend 4-5% to the Tatas because they will not want to lose such a customer.”
Credit has increased slightly since the start of the year to 1.9% as of Nov. 19, according to weekly data released by the RBI.
Of the Rs 23,000 crore, Rs 18,000 crore will finance the acquisition and the rest will be for operations. Within three to six months of taking the loan, the company plans to have it appraised, people said. The loan agreement is expected to be signed before Christmas, they said.
The winning bidder Talace had offered Rs 18,000 crore, of which Rs 15,300 crore is Air India’s existing debt and Rs 2,700 crore is paid in cash to the government. The deal with the government does not include real estate. As per the agreement, Tata Sons will retain all employees, at least for one year.
Air India has a fleet of 117 wide and narrow body planes. Tata operates Vistara in partnership with Singapore Airlines and AirAsia India in partnership with Malaysian company AirAsia Bhd.