Proceeds will be used to strengthen cash flow, operating capital and to cut debt Air China, the nation's biggest international airline, plans to raise two billion yuan by selling short-term bonds next Tuesday to replenish its capital, after the domestic initial public offering this month fell short of its fund-raising target. The carrier will sell the one-year bonds to institutional investors in the country's interbank market, according to a statement on the website of China Government Securities Depository Trust & Clearing yesterday. Proceeds from the sale will be used to strengthen the company's cash flow and operating capital as well as reducing debt. Air China raised 4.6 billion yuan from the listing in Shanghai earlier this month, 2.3 billion yuan less than the initial target amid weak demand. The airline also said it received a 30-year loan of Euro30.5 million (HK$304.1 million) from the Spanish government. 'Debt investors should favour the sale by such a big company as Air China,' said a fixed-income investment banker with a Guangzhou-based securities firm. 'Such investors would care more about the coupon rate and the firm's ability to repay on time rather than its profitability.' Insurance companies that are usually awash with cash may be the main buyers of Air China's bond sale, he added. Institutional investors, especially fund managers, shied away from Air China's IPO as they were worried about the industry's outlook, prompting the airline to cut the deal by 40 per cent. The country's airlines have been suffering from the rocketing crude oil price which has tripled since 2002 and reached a record US$78 per barrel last month. Although Air China's net profit margin was 4.3 per cent last year, which was higher than other listed carriers, it was still lower than companies in other sectors. The company had intended to use proceeds from the A-share listing to finance the purchase of 45 aircraft. It would also spend 600 million yuan to expand Beijing's international airport. The mainland's rising interest rates will encourage investors to ask for a higher coupon rate when they bid for Air China's bonds, making the sale more costly for the company. On August 18, the central bank announced that it would raise the benchmark one-year lending rates by 27 basis points to curb the rapid economic growth, its second move in the year. The increase lifted the one-year rate to 6.12 per cent. Air China will fix the coupon rate next Tuesday. A total of 228 one-year short-term bond sales with a combined value of 332 billion yuan were sold by companies including state-owned Sinopec and China Unicom since the country allowed them to do so last year. Of those, 63 bonds were fixed-rate bonds with coupons ranging from 2.28 per cent to 4.3 per cent, while others had floating rates. Shares of Air China in Shanghai closed unchanged at 2.78 yuan after falling as much as 1.1 per cent yesterday. The carrier's Hong Kong-listed shares were also unchanged at HK$2.73 after dropping as much 0.7 per cent.