Potential investor Victor Li is gone and Deutsche Bank has agreed to back an expanded rights offering to Air Canada creditors that will put them firmly in control.
Under this new deal, Deutsche Bank will guarantee a rights offering that is increased from C$450 million ($330 million) to C$850 million, replacing C$400 million of the C$650 million capital injection that Li's Trinity Time Investment had agreed to make. Li abandoned that bid when it expired on 30 April because of his concerns over the company's condition and the impasse provoked by his pension demands.
Even with this new deal, Air Canada must still find an investor to fill the $250 million gap between Li's bid and Deutsche Bank's guarantee, but insiders do not see this as a major obstacle. The bigger task will be to convince the unions to accede to a condition imposed by Deutsche Bank regarding earlier labour concessions.
When the unions agreed to a package of cutbacks last year, it was estimated they would save C$1.1 billion a year. A recent audit concludes that those concessions are actually worth only C$900 million. Deutsche Bank wants employees to make up the difference with further reductions. Although they are sceptical, the unions are discussing this with Air Canada.
The Deutsche Bank deal is the outgrowth of an effort by Air Canada's major creditors to craft an alternative plan that would give them the potential for a higher recovery. Many of them opposed Li's Trinity bid because it gave him a 31% stake in the airline, thus diluting any shares they took in capitalising debts.
Under this new plan, an equity investor who puts up C$250 million will only receive a 12% stake, and creditors will end up owning at least 75% of Air Canada. The new equity search is less likely to provoke the sort of impasse that led Li to walk away.
Under the terms approved by the court, any bid must be submitted by mid-June and may not contain conditions on issues such as pension funding. Unlike Li's bid, Deutsche Bank's plan does not contain any retention bonus for Air Canada chief executive Robert Milton.
DAVID KNIBB SEATTLE
Source: Airline Business
