According to sources in the company: "The airline plans to collatorise the receivables for a period of seven years while taking a grace period of at least two years on interest payment," or an average life of five years.

While the mark-up over the five-year US treasury -- now quoting at 5.5 per cent thereabouts -- is yet to be finalised, industry observers feel it should range between 200 and 250 basis points. Going by this observation, the transaction would be priced at around 7.5 to 8 per cent per annum.

While Air India has decided to collatorise its US-linked routes, it is yetto decide on how much cushion it will offer for the amount projected to be raised. As is the industry practice, the deal will be over collatorised to take into account any aberrations which may occur in estimated revenues from the US routes.

Air India has been making a net loss of around Rs 240 crore annually and plans to slash it by at least Rs 60 crore by the end of fiscal 1998-99. However, industry sources said that since the securitisation deal is directly related to the quality of receivables which are collatorised, the actual balance sheet is not of great consequence.

As regards the receivables, all the existing US-related routes will be collatorised. Also, there is a possibility that a few new US-bound routes may be introduced to improve earnings from this sector. The airline's sub-committee on route rationalisation is expected to meet next week and work on this option.

The plan to securitise a loan against projected cash revenues is a first in the country, though loans have been extended againstcash flows to the cellular telephony players in the continent. Traditionally, immovable assets like property and machinery, among other things, are used as receivables by companies to secure a loan. The airline, meanwhile, has already applied to the ministry of finance for a clearance certificate regarding the appointment of a lead manager for the deal.

Misplaced hopes

The cost of the issue is a critical factor for Air India to consider. Hopes of the airline obtaining a fine rate of 200-250 basis points above US Treasury are misplaced. The outstanding bond issues from ICICI with a four-year maturity are traded at a spread of 290 basis points above US treasuries. Outstanding issues from Reliance, which is considered to set the benchmark for Indian papers, though of seven-year maturities, are traded at a spread of 650 basis points above US treasuries.