J.P. Morgan (NYSE:JPM) has become the sole underwriter of a loan which replaces a bridge loan from Standard Chartered, originally used for the purpose of Air India acquiring new planes for its fleet. The bridge loan refinanced was for $1.1 billion.
The loan from J.P. Morgan is of a longer term than usual for commercial loans, with terms very favorable for the airline. Officials from Air India claim the new loan will save the company about $30 million over its duration, and is a minimum of 3 percent lower in its interest rate than going market at this time. The length of the loan is for 11 years. That $30 million saved in costs is in relationship to the lower interest rates.
The funding will be used to acquire seven Boeing 777s, which will be used for the longer routes undertaken by Air India, along with three 737-800s for Air India Express, which flies the shorter routes.
There were two reasons this deal took place. On the Air India side of it, and the Indian airline industry in general, they have struggled to attract financing, especially the private airline industry in India, and so this was used as not only an individual case to expand Air India airlines, but to showcase a deal for the Indian airline industry as a whole that some are willing to take a chance on them, and deem them a healthy risk.
For J.P. Morgan, on the outside it looks like a risky move to make as far as the deal itself, even though there are guarantees from the U.S. Exim Bank in the deal, along with Indian state ownership in the airlines.
Not only is J.P. Morgan the sole underwriter of the $1.1 billion loan, but they also plan to keep the loan on their books, generating even more exposure if something were to go wrong in a notoriously difficult industry anywhere in the world, let alone India.
Other than outside guarantees, the structure of the loan, specifically its length, is what is looked to as a key to building a safety net within the structure of the deal itself, putting less pressure on the struggling airline to meet terms of the loan it may not be able to if they were more stringent and at existing market interest rates.
Keeping the loan on the J.P. Morgan books is a nod toward Air India and the Indian aviation industry. J.P. Morgan is attempting to say through that action that they have full confidence in Indian aviation by doing that, and the country is hoping that could result in more loans from other financial sources as a result.
J.P. Morgan has even went so far as to say they’re going to keep the loan on their books until maturity, although that’s a highly unlikely scenario. The reality is we’ll probably see it kept on the books until more loans flow into the industry. Once that happens we’ll probably see the loan sold in the secondary market as usual. That will take some time either way.
All of this leans toward the benefit of Air India and the Indian airline industry. Why is J.P. Morgan taking this type of obvious risk? The answer is from their point of view this really isn’t a loan but a marketing expense.
In other words, J.P. Morgan has had a strong role in aviation financing through the years, and are looking to expand that beyond their strong play in the U.S. India’s growing air travel market is a good place to do that with a tremendous amount of growth potential for years into the future.
So how this benefits J.P. Morgan is to show they’re willing to take on big loans in airline industries in other countries which will help those airlines be successful because of the favorable terms of the loans; although we probably won’t see these terms in followup loans in the future.
This deal with Air India is a loan for the purpose of marketing. Whether or not it’s successful isn’t the major point of the deal, but that the word gets out that they are a player in the global airline industry is what this loan is all about.
In that sense, this is a good move by J.P. Morgan, and could result in numerous airline loan business in emerging markets, which is what all of this is targeting.
