Nepal Airlines Corporation (NAC) has become a highly leveraged company with debt reaching critical levels. According to Managing Director Sugat Ratna Kansakar, the company’s current debt-to-equity ratio is 76 percent. It is expected to swell to 92 percent after it obtains the remaining Rs16 billion loan to pay for two wide-body Airbus A330-200 jets it has on order. 

The debt-to-equity ratio indicates the soundness of a company’s long-term financial policies. It shows the relation between the portion of assets financed by creditors and the portion of assets of the company.

NAC has borrowed Rs24 billion from the Citizen Investment Trust (CIT) and the Employees Provident Fund (EPF) to buy the jets as part of an ambitious fleet expansion plan.

The two lenders have provided Rs4 billion each to NAC as the first installment to allow it to make the pre-delivery payment to the aircraft supplier. The final installment will be issued after planes are delivered. The first of the two planes is expected to arrive in Nepal in May, and the second one by June in 2018. 

The national flag carrier already owes the EPF Rs10 billion which it borrowed in 2015 to buy two Airbus A320-200 aircraft. These jets were the first addition to NAC’s fleet in 28 years. The corporation has also borrowed Rs3.72 billion from China EXIM Bank to pay for four Chinese-made aircraft. By this fiscal year, NAC’s loans will total around Rs38 billion. 

“We have urged the government to raise the equity investment to improve the financial health of the corporation,” Kansakar said. NAC officials said that they needed to have a favourable debt-to-equity ratio to make it financially sound to bring a strategic partner. 

A high debt-to-equity ratio means that the company will also be forced to make more interest payments on its debts before net earnings are calculated. A higher debt-to-assets ratio is riskier for equity investors. The potential infusion of cash in the form of equity by the government will be a positive move to speed up the process of inducting a strategic partner, they said.

Last July, the NAC board decided to boost its investment capital which has remained unchanged at Rs370 million since its establishment in 1958. Subsequently, the Tourism Ministry sought Rs20 billion from the government to raise NAC’s paid-up capital to support its financial restructuring plan. 

NAC currently possesses two Airbus A320 aircraft and one ageing Boeing 757 to serve the international sector. It has sold one of its two Boeings which have been in service since 1987.

The airline’s domestic fleet consists of three vintage Twin Otters and four newly arrived Chinese-made aircraft, two MA60 and two Y12e. Kansakar said that the last time the domestic fleet was expanded was 45 years ago.