Adam Smith

It will be the largest single voting interest, but it's nowhere near a control position.

I'm not sure about that. The equity is dilutive, but a big chunk of the loans are ridiculously cheap, and this should remove any insolvency risk that may have remained.

tcook052

Speaking solely as a struggling TA it was good news to read this line:

Quote:

In support of its travel agency partners, Air Canada will not retract agency sales commissions on refunded fares;

Codyul

I think some details are missing. From what I read at 5pm on AC press release, what is agreed upon as actually happening is 500million for shares, giving 6 percent stake.
I'm assuming the 19.99 is a preventative thing to stop feds from ending up with more and more (a la France, Netherlands).
But hey, maybe I'm dead wrong ha.

Adam Smith

You're right that the government will initially control about 6.1% of the equity, or 8.6% fully diluted (i.e. including the additional shares that could be issued pursuant to the government's warrants, the convertible debentures, and options).

There doesn't seem to be any mechanism for the government to acquire additional shares or warrants, other than what's already in that press release, and the release is explicit that this limitation applies to "the shares acquired pursuant to this investment". A subsequent financing for additional money would likely be a separate "investment" subject to its own terms. So I don't think this prevents the government from increasing its stake over time if it puts in more cash.

I suspect the 19.99% limit relates to AC's voting structure. AC has two classes of shares:

• Class A (for non-Canadians)
• Class B (for Canadians)

Shares automatically convert from one class to the other when they become owned by someone from the other category, e.g. if an American sells a Class A share to a Canadian, it automatically becomes a Class B share.

The two classes each have one vote per share, unless the Class A shares, in aggregate, would exceed 49% of the votes. If they do, their collective voting power is capped at 49%. This is to comply with foreign ownership limits on Canadian airlines.

If a lot of the shares get bought up by foreigners, the voting power of the Class B shares could increase significantly, meaning it's theoretically possible for the government's voting rights to significantly exceed its equity ownership. The 19.99% cap prevents the rights from going beyond that level.

It's possible that, in addition to the business/optical reasons, this was done to comply with stock exchange rules, which might have required shareholder approval for an issuance that could have created ≥20% dilution, based on the scenario I outlined above, but given that's a contingent scenario, I don't know whether that's the case.

By the way, at the the moment, about 33.7% of the shares are Class A, and 66.3% Class B. Pro forma the government's new stake, it's 31.6%/68.4%. So we're a long way from that coming in to play.

tracon

• Gross proceeds of $500 million for Air Canada shares at a price of $23.1793 per share;

So the government is up about 15% already?

• $1.5 billion in the form of a secured revolving credit facility at a 1.5% premium to the (CDOR); ....
• $2.475 billion in the form of three unsecured non-revolving credit facilities of $825 million each with: the first, five-year tranche at a 1.75% premium to CDOR per annum; the second, six-year tranche at 6.5% per annum (increasing to 7.5% after 5 years); and the third, seven-year tranche at 8.5% per annum (increasing to 9.5% after 5 years);

My understanding is the CDOR rate is currently just over .4%.

If I understand this announcement, this is mostly a bunch of low interest money.
Not a "bailout" in the sense of a grant.

mileageking

Agree no grants, just low interest loans with stipulations.

BTW you missed money for refunds of $1.4B as unsecured loan payable over 7 years at 1.211% annual rate.

Adam Smith

AC has paid north of 10% on some of its recent secured financings, and 15-20%+ on unsecured financings. You're right that this isn't a grant, but it's substantially cheaper than what AC could obtain in the market, even accounting for the dilution from the cheap equity. So I would still call that a bailout (a bailout doesn't have to be grants - the vast majority of the financial crisis bailouts were loans or shares of one form or another).

tracon

How much is the government of Canada paying on the money it's borrowing to lend to AC?
Is any of it less than 1.211%?

This low interest loan/bailout seems to be a lot about optics.
T2 can say he never "gave" anything to AC.

I can't believe AC gave up 3 months of sun flying for the price of a low interest loan.

mileageking

Tax payer dollars and maybe even classified as gross debt over 5-7 years until paid back. From the very beginning I don't think T2 was a fan of giving anything (maybe for the right reasons). I think the whole sun flying was optics too as AC would have been forced to stop or severely impacted regardless with the new government restrictions. Anyway glad they settled.

EdmFlyBoi

Not sure if that is necessarily the case. The stock may have some lability over the next year, but most analysts have it as a buy or strong buy as AC has some of the best fundamentals in the industry. If the Canadian Government looks to exit ownership in the future, and does so after the airline industry comes part or all of the way back, this may ultimately be a good investment for the taxpayer.

bid.shader

Agreed. Shares seem to be at least quoted ok in the pre-market today - I've seen some indications at $27.50-$28.35. That's not always indicative of how they will actually open at 9:30, but suggests overall at least that the current expectations are that the stock will trade much better than the gov't's deal price...

bid.shader

You have a source for this? I see a convertible issued in 2020 with a low coupon of course, and a straight callable bond with a 9% coupon. Where are you seeing the 15-20% rates? Were these bank loans? Wondering where to get data on that. Thanks!

EdmFlyBoi

Shares up slightly. I suspect that there is generally positive sentiment that this is a good deal for AC. It might ultimately be a good deal for the government as well if the stock holds over time. They are up $4 a share based on what they are paying for the shares as part of the deal.

Adam Smith

Yes, although they're likely stuck holding the stock for at least a few months.

Yes, the government is typically borrowing money at far less than those rates.

https://www.bankofcanada.ca/rates/in...anadian-bonds/

Average yield on 1-3 year debt, 0.28%. On 3-5 year debt, 0.78%. The benchmark 7-year bond is currently at about 1.23%. I presume it was trading at 1.211% on Friday and that's how they arrived at the interest rate for that loan. Something along those lines.

Here's a post from last year where I did some numbers on the actual cost of a couple of AC's financings, with 9.5% on one of the secured financings, and 12.4% on another one. In both cases, the true cost exceeds the coupon because the notes were sold at a discount, and you have to account for the amortization of that discount.

As for the converts, you have to look at the value of the conversion option that was sold in addition to the 4% coupon. Investors purchase those notes in the hope of making a profit on that option, as opposed to just the coupon. For some reason, I was thinking I had estimated the cost of those at 15%+ last year, but I see now I made a post back then suggesting 8-12%, which seems low. I don't have a Bloomberg or anything fancy like that these days, so I don't have access to the data on volatility etc that would be necessary to make an actual calculation. For what it's worth, the accounting methodology used for financial statement purposes computes the effective interest rate at 10.76%, which I think probably underestimates it, given the stock was trading at ~5-year lows, down ~75% from the peak, at the time.

As for when they sold equity, since common shares don't carry a hard dollar cost like an interest payment, you have to look at the implied return that investors were expecting when the stock was sold to estimate the "cost". I have no numbers at all on that one, just my professional gut feeling, which was thinking that investors would be expecting north of 10% and probably 15-20%+.

One other point to consider when comparing the government financing to private sector financing is fees. AC paid investment bankers at least 4% to sell the convertible debentures and common stock last year. That's a one-time fee rather than an annual one, but it adds ~0.8% a year to the cost of the convert, for example. The stock sold to the government presumably doesn't come with any such fees.

Anyway, I don't know exactly what AC's cost to raise capital today would be (note that my comment was on what AC has paid in the recent past for some of these things). The market is overall more favourable to airlines, but there's also a lot more debt on AC's balance sheet than there was a year ago. They did manage to do some EETCs (secured aircraft financing) at 5.73% and 5.25% in September. But one of the problems is what assets does AC have left to pledge? Part of why those financings I mentioned earlier in this post were so expensive is that they were secured, but deeply subordinated (i.e. ranked behind other secured financings). But it's still safe to say that private investors would be looking for significantly higher rates than what AC is paying the government for all these loans.

bid.shader

Thanks. Currently those 9% bonds are trading at a spread of about 530bps over Canadas, which is why I was surprised to see you quote the 10+% financing cost on secured debt. I can do the math on the converts as well, which are mostly trading as hybrid equity now. (quoted around 160% of par). Thanks for the follow up.

I think overall the package has been received OK. Stock trading down about $1 but well above deal price.