The sale would be the biggest corporate bond sale guaranteed by the government, and is part of India's commitment to resuscitate the country's flag carrier through a $5.8 billion government bailout.
Despite the size, traders said Air India will not struggle to sell the 19-year bonds, given they would offer a higher yield than federal bonds of similar maturity while providing the same government "unconditional and irrevocable guarantee."
"(The) majority of the issue will go to the hands of big institutions like the provident funds and insurers as it has a central government guarantee," said Mohan Shenoi, president of group treasury and global markets at Kotak Mahindra Bank.
Air India is seeking to sell the debt via a private placement of bonds, which will replace existing bank loans. The bonds will be re-payable in five equal instalments starting in the 15th year from the date of allotment, the document showed.
The airline is looking to pay a coupon that will offer a spread over a government security of similar maturity, but will be subject to an overall cap of 9.50 per cent per year, according to the document.
Traders expect the carrier could end up pricing the deal at around 9.25 per cent. By comparison, India's federal 2030 bonds are trading at 8.50 per cent.
Dealers also pointed out that utility Damodar Valley Corp sold Rs 44 billion of 15-year government-guaranteed bonds at 9.51 per cent in March.
Indian airlines are reeling under a combined debt load of $20 billion and annual losses of $2 billion, with a weak rupee adding to their already-hefty fuel costs.
All but one of India's six big airlines lose money. Air India is in a particularly chaotic situation, having suffered through a recent pilot strike and cancelled flights.
Copyright @Thomson Reuters 2012