Low-cost carrier Air Deccan on Friday announced it has signed a deal with a consortium of European banks to raise $100 million (Rs450 crores) over the next 15 months in order to meet operational expenses and develop its market in the future.
The funds will be advanced in an innovative fee-based financing plan.
The first tranche of $30 million of the $100 million has been received from the consortium consisting of Investec Bank, UK and HSH Nord Bank AG of Germany.
In turn, Air Deccan has assigned its future aircraft supply contract, involving as many as 60 Airbus A-320 aircraft over the next seven years, in favour of a Special Purpose Company (SPC) funded by these banks and registered in the Cayman Islands. A charitable institution based in Cayman Islands will also form a part of the consortium.
In return for renouncing its rights, Deccan would receive the $100 million, which is non-refundable and will accrue to its profits.
Deccan retains the right of first refusal to take delivery of the aircraft and the way it would like to structure the financing. The banks will make money when Deccan goes to take delivery—it would have to pay a premium over what the airline had agreed to pay to the Airbus.
"This pioneering financial deal is a landmark in the Indian aviation sector. This reflects the investor's trust in our strong and robust business model, acceptance of the low-cost carrier concept in India and our strong management team," Mohan Kumar, Director-Finance, Deccan Aviation Ltd, the company that owns Air Deccan, told a news conference.
"The fee that we will pay to the SPC at the time of delivery of each aircraft is reasonable. This deal is the best because it does not put pressure on the company for additional cash flow. Even a public issue costs about eight per cent (in terms of expenditure) of the total funds," he said.
Hit by fuel costs and addition of new aircraft and routes, Air Deccan with a 21.2 per cent market share, had reported a loss of Rs 340 crore in the April-June quarter, on revenues of Rs 1,352 crore.
Capt GR Gopinath, Managing Director, said "This deal would go a long way in ensuring Air Deccan's financial stability and insulating us from the turbulence in the domestic aviation industry."
Asked if Deccan faced potential problems from equity investors who may shy away from future investments, Kumar said: "That's not the case. Equity is expensive and repaying debt will constrain cash flows when we are in a growth phase. We wanted to explore the other options before going back to investors or diluting our equity."