The finance award was presented to ACE Aviation Holdings
Air Canada is not the first airline to restructure its finances in bankruptcy, converting several billion dollars in unsecured debt into equity while raising millions more in new equity, nor the first to form a holding company to own the airline, nor probably even the first to refinance expensive debtor-in-possession loans within six months after leaving bankruptcy.
But the financing move that sets Air Canada's holding company apart is the way it has extracted cash - what chairman Robert Milton likes to call "monetising" its assets while retaining control. The holding company idea surfaced in Air Canada's bankruptcy restructuring plan. From the outset, it was designed to transform separate operations into standalone businesses.
When Air Canada emerged from reorganisation in September 2004, it became a wholly owned subsidiary of ACE Aviation Holdings. Other operations - ranging from its loyalty programme to its regional carrier and other businesses - became separate legal entities, all under ACE. Milton, who moved up from Air Canada to ACE, explains: "The key driver in the formation of ACE is to push these businesses to run as true, profit-focused businesses, like they never have before under this mass called Air Canada."
This was only the first phase. After corporatising these units, ACE launched into the monetising phase. It began in June 2005 when ACE turned AeroPlan, its loyalty programme, into an income trust and launched an initial public offering. One eighth of AeroPlan raised C$250 million ($200 million). ACE repeated this success with an IPO in February of regional carrier Jazz, selling a 20.3% stake for C$250 million.
A month later, after announcing a 2005 profit, it made a capital distribution to shareholders valued at C$250 million. Instead of cash, it gave Canadian shareholders more AeroPlan units. It publicly sold an equivalent number of these units and gave cash to US shareholders because income trusts can only be owned by Canadians. When ACE completed this exercise, it had distributed or sold another 11.8% of Aeroplan.
These transactions share similarities. First, each involved a C$250 million tranche - whether it was an IPO, capital distribution, or combination of both. Second, ACE remains in control. After these deals it still owns 75.3% of AeroPlan and 79.7% of Jazz. Whether this pattern will persist with other asset sales remains unknown, but it is certain that ACE plans more.
The maintenance unit Air Canada Technical Services is next, probably in the first half of 2007. Milton even talks of selling Air Canada itself. Monetising assets has its critics. They argue that it raises costs because each division has the overhead of a stand-alone company and must mark up its prices - sometimes at the expense of the airline it supports. But ACE has raised C$750 million from selling these minority stakes. Borrowing that amount would have cost it substantially more in financing charges. "ACE has done a remarkable job in identifying shareholder value in a traditional corporate structure," said one judge. This is the kind of innovative thinking that earns ACE Aviation Holdings this year's Finance Award.
Source: Airline Business
