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Aviation Industry Secures High-flying Deal - International Law Office

International Law Office

Asset Finance - India

Aviation Industry Secures High-flying Deal

September 12 2001

Jet Airways, India's largest private airline, has concluded a Rs16 billion deal with international guarantee, at a cost below AAA rated paper in the domestic market. The transaction raised Rs16 billion for a 12-year tenure at a cost of 70 basis points over the seven-year government securities at a cost of 11.7% at the time of the initial transaction. This is the first rupee transaction to be supported by the US Exim Bank, which took on the credit risk upon the purchase of aircraft by an Indian operator.

The Indian currency component was important because the Indian operator Jet was not keen on foreign currency exposure in its books. Though Jet earns about 30% of its revenues in foreign currency, the foreign exchange debt already present on its balance sheet would cancel out the impact of such earnings. Besides, the company also has to account for foreign exchange-linked exposures on aviation fuel. Thus, it was prudent for Jet not to go in for further dollar exposure.

An offshore special purpose trust was created, which owned the aircraft. Jet entered into a rupee-denominated hire purchase agreement with the trust because the US Exim Bank insisted that nominal ownership of the aircraft should vest offshore, enabling easy possession of the aircraft in case of default.

The complex nature of this landmark deal can be gauged from the fact that validation from experts for the legal and taxation angles took almost three months.

Meanwhile, Air India plans to take at least two more aircraft on dry lease to tap the profitable routes to the Gulf and the Middle East. This would enable Air India to reduce the cost of manpower associated with wet leasing.

Finally, Reliance Petroleum, India's leading petroleum products private company, has concluded a three-tranche $250 million term-loan facility priced at an average cost of 123 basis points over the London Interbank Offered Rate. The term-loan facility was completed on August 24 2001 and witnessed over subscription to the extent of roughly 25% of the base amount. The proceeds from this facility will be used to finance Reliance Petroleum's capital expenditure. The facility was arranged by ANZ Investment Bank, Standard Chartered Bank, Citibank and Salomon Smith Barney. This loan transaction follows a $500 million term-loan facility signed in July 2001.

Each tranche of the facility's three-tranche structure has a different repayment profile. The maximum average life of the facility is 5.75 years. The tenure of the first tranche is 3.75 years, the second is 5.25 years and the third is 7.75 years.

For further information on this topic please contact Ravi Nath at Rajinder Narain & Co by telephone (+91 11 506 5000) or by fax (+91 11 506 3580) or by e-mail (rnc@del2.vsnl.net.in).

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