LIC Makes 100% Exit From Air India, Gets Back Rs 3800 Crore ‘Debt Investment’ At A Premium!

LIC has exited its entire investment in Air India’s (AI) debt instruments before the latter’s handover to Tata Group on Thursday.

Exit At A Premium

Sources say that LIC sold its holding of Rs 3,800 crore back to AI after it offered to pre-pay debt worth Rs 12,900 crore to investors.

The insurer exited at a premium and will not invest in AI in the future since it is now owned by a private limited company.

AI was a AAA-rated entity and its debt was backed by the government, with LIC and State Bank of India being the top investors in the debt.

Ahead Of Tata Takeover

The airline was offering an interest rate between 9% and 10.5% on these debentures, resulting in a substantial outgo for the airline.

It prepaid the non-convertible debentures to reduce its debt before the handover.

Talace, a subsidiary of Tata Sons, is taking over AI at an enterprise valuation of Rs 18,000 crore.

Of this, Talace will take over Rs 15,300 crore of standalone debt, and the rest will go to the government as equity value.

Insurers Not Allowed To Invest In Private Firms

Lenders said that Tata Sons was also an AAA-rated company but LIC wouldn’t be able to invest in it because the Insurance Regulatory and Development Authority of India (IRDAI) regulations prevents insurance firms from investing in private entities.

LIC had earlier exited Tata Sons’ debt instruments, citing the IRDAI norms after Tata Group’s holding firm became a private entity.

AI reported a total income of Rs 5,249 crore and a loss of Rs 5,422 crore, according to its standalone numbers for the first half of the current financial year.

It had a negative net worth of Rs 49,967 crore and paid a finance cost of Rs 2,040 crore for the half-year ended September 2021.

Debt Transfer To AI Special Purpose Vehicle

On a consolidated basis, AI had debt worth Rs 62,361 crore as of March 2020, of which it will transfer Rs 46,262 crore to another government-owned entity, Air India Assets Holding Limited (AIAHL) since it is no longer a public sector company.

Buildings and other real estate valued at Rs 14,718 crore are also being transferred to AIAHL.

AIAHL was set up by the government in 2019 for holding debt and non-core assets of the Air India group.

AI Turnaround Made Easier For Tatas

Lenders have also agreed to extend loans worth Rs 23,000 crore to Talace at an interest rate of 4-5% per annum.

Tata Group will use these funds to replace the debt it will take over and invest the rest in the airline’s operations.

Lenders say that Tata Group may find it easier to turnaround the airline with AI’s finance cost coming down substantially.