Canada and Air Canada come to a loan and financing agreement!
Just over a year ago, I made the argument that a loan was needed for the Canadian aviation. Now, just over a year later, Air Canada and the Government of Canada have come to an agreement on financial support. Let’s take a look at what this means for travellers, and stockholders (and yes, we know WestJet isn’t pleased), and how the approach that I suggested was taken by the government.
The Deal
Announced today, April 12, 2021, the Government highlighted 4 things in the financing deal, refunds for Canadians, protecting Air Canada jobs, supporting jobs for the Aerospace industry and restarting flights to smaller cities.
Many people have been complaining about not getting refunds (more at the Prince of Travel) for their previously booked flights, and it makes sense, as travel is a big-ticket item that is a large line item on many people’s budget, including the middle class. That said, many people had their flights cancelled, representing a significant amount of discretionary income that will help support middle-class families which will support them during the recovery.
Protecting aviation jobs is important, as these are relatively well-paid jobs that are located all around the country, with a large portion in politically important Quebec. In addition, the Aviation industry employs a significant amount of Canadians, including the manufacturing of the (former Bombardier C Series) A220 in Quebec. Air Canada has agreed to maintain staffing levels at the same amount as of April 1st, 2021 and they will close on the remaining A220 airplanes they ordered prior to the pandemic. Overall, while this is partially buying votes, these are important jobs to support, as having an aviation manufacturing industry is something that’s important to maintain because as soon as it’s closed, it’s not coming back.
Finally, returning links to small towns, including Yellowknife, Fredericton, Prince Rupert, and Saint John is important for the government and all Canadians. Other countries, including the US, pay for small airports to have air service, so it’s not surprising the Canadian government wanted the return of service. For residents of these small towns, having access to quicker shipping, and flights to larger centres is a part of ensuring that the economy bounces back as soon as possible.
For Air Canada to follow through with this, the Government of Canada provided the following financing (as per the financing agreement on Air Canada’s website):
Government of Canada is buying $500M shares at $23.1793 per share ( ~21.57M shares)
Government of Canada is providing $1.5 billion in the form of a secured revolving credit facility at a 1.5% premium to the Canadian Dollar Offer Rate (CDOR - currently offered at 0.435%)
$2.475B in the form of three unsecured non-revolving credit facilities of $825 million
the first, five-year offer 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)
the third, seven-year tranche at 8.5% per annum (increasing to 9.5% after 5 years)
The Federal Government has warrants to purchase up to 14,576,564 shares at $27.2698/share during the next 10 years. The exact number of warrants is between 7,288,282 to 14,576,564, proportional to the amount of debt AC draws
Up to approximately $1.4 billion in the form of unsecured credit, facility tranche to support customer refunds of non-refundable tickets. The facility will have a seven-year term and carry an annual interest rate of 1.211%
Can’t wait to fly again!
My Thoughts
Overall, the equity-based approach is what I made the argument for last year, so I’ll pat myself on the back for that one. I actually also argued for the Government to wait until the end was near for them to finalize the funding. With vaccine rollout continuing to ramp up, the end is near, so it was time to support Air Canada to support the recovery.
Ultimately, with Michael Sabia, the former CEO of BCE and the Quebec Pension Plan leading the negotiations for the Government, we knew that the government wouldn’t roll over and give Air Canada free money. While this is a political play in Quebec, especially before what I believe there will be an upcoming election, there is a good possibility that this works out as a net positive for the Government of Canada. If Air Canada returned to $50 a share, the Government of Canada, even if they only exercised the warrant for half of the shares, would have an upside of about $750M from their bought price, more than paying for their lending. It’s a win, win situation for taxpayers and Air Canada.
That being said, the loser of this deal are short term Air Canada shareholders, who will likely see a price reduction tomorrow during market open due to the dilution of their shares, Air Transat shareholders, who are holding the bag of an airline that may or may not have enough money to keep running and WestJet (maybe they need to get rid of their awful additional charges like Air Canada did) and Sunwing owners, who are privately held, and likely mad about this deal. Ultimately, I suspect Air Transat announces a deal within the next few weeks, and WestJet and Sunwing get additional funding, but to a lesser extent.
The Point
This isn’t a complete bailout, but a win for both Air Canada and the Government of Canada, as we look to restart the recovery. If Air Canada can recover quickly, Canada will actually make money on this deal, while that will be a good sign for the economy. Now, let’s hope that vaccines continue to work and that we can travel this Fall!
