IndiGo approves set up of finance aviation assets subsidiary

UPDATE - Today, IndiGo’s board approved the setting up of a wholly-owned subsidiary company to finance aviation assets. The Board also approved an investment of Rs 300 million in one or more tranches in the subsidiary apart from agreeing to provide a corporate guarantee of up to $996 million to secure payment obligations by the subsidiary (Stock exchange disclosure under Reg 30 reg Gift City) (bseindia.com). Incidentally, Air India, which the salt-to-airline conglomerate took over, Tata has also initially set up a subsidiary in GIFT City to finance widebody aircraft. In June this year, AI signed an agreement to purchase 250 Airbus and 200 Boeing aircraft in a deal valued at over $70 billion. IndiGo’s subsidiary is also based in Gift City, Gujarat, in western India, which is being developed as a global financial services hub by the Indian government. The International Financial Services Centres Authority (IFSCA) was established in April 2020 under the International Financial Services Centres Authority Act, 2019. It is headquartered in Gift City, Gujarat. The move by IndiGo (and Air India earlier) comes when CAPA India estimates that the country is expected to acquire up to 1,000 to 1,200 aircraft over the next 24 months. In India, 80-85 percent of the domestic airlines’ fleets are estimated to be funded through operating leases, mostly abroad. The IndiGo Board also approved placing an order for ten additional A320neo aircraft, which are part of an original order placed in 2019. This order comes some two months after IndiGo signed an agreement with Airbus to acquire 500 Airbus family aircraft at a deal valued at $50 billion at the Paris Airshow in June this year. Some 450 aircraft are yet to be delivered to the airline, and it feels that the 500 aircraft order will provide a further steady stream of deliveries between 2030 and 2035. According to Ashutosh Sharma, General Manager, IFSCA, establishing leasing units by leading airlines such as Air India earlier and now IndiGo will push Gift IFSC’s position as an aviation leasing hub. “Gift IFSC provides a competitive landscape for undertaking aircraft leasing services,” he said. Air India and Indigo will now undertake wide, narrow-body aircraft leases from Gift City. So far, Gift City has executed leases of more than 100 aviation assets, including commercial aircraft and helicopters. Now, with airlines undertaking wide and narrow-body aircraft, there is a significant uptick, and these are still early days for Gift IFSC. Signal of confidence Commenting on the latest development in IndiGo, the former Chief Financial Officer of a major airline in India points out that the purpose of the new entity is to isolate any contingent liability from the main company. He adds that, however, any Corporate Guarantee given by a shell company may have to be counter-guaranteed by the main company if it has to secure the confidence of the lessors since the subsidiary has no assets. “Perhaps this structure is being done to protect the interest of the main Company shareholders and make the guarantee off the balance sheet. The counter guarantees may kick in only if the subsidiary defaults in its payment obligation,” he feels. Terming the announcement by IndiGo as “interesting as it entails setup of a leasing entity”, Satyendra Pandey, Managing Partner of Aviation advisory firm AT-TV adds, that as the entity will be a wholly owned subsidiary the depreciation benefits can flow through. “The announcement also indicates a fairly significant corporate guarantee. This is interesting as aircraft are highly mobile assets and the assets themselves are collateral. However, challenges especially with the Cape Town Convention and the conflict with local laws remain. This is best evidenced in the ongoing GoFirst insolvency and matters pertaining to repossession of aircraft,” Pandey points out. He is of the view that whether Indian banks will finance the transactions on Rupee terms remains to be seen. “One cannot also overlook the interest rate and inflation scenario. Aircraft are long-term assets and thus the financing has to have similar elements,” Pandey says. He adds that the “announcement is a signal of confidence in the Indian government's vision towards in-country leasing. Implementation will be key and real success lies at the point where it becomes more competitive to lease via Indian entities captive or otherwise”.

No results