Major Air Canada holder endorses bailout and sees 50% upside

Rescue package: Air Canada airplanes at Vancouver’s international airport. Letko is the airline’s third-largest shareholder. — Reuters

TORONTO: Letko Brosseau & Associates Inc, one of Air Canada’s largest shareholders, says the terms of the government’s rescue package are fair and the airline’s stock could rise about 50% from current levels once the pandemic eases.

Canada’s largest carrier reached a deal Monday with the federal government for loans and equity worth C$5.9bil (US$4.7bil or RM19bil).

The company will be able to get access to five new credit facilities; the state will buy an ownership stake of more than 5% and receive 14.6 million warrants to buy more shares.

“In spite of the dilution that we see, we still see a path for this company to be worth, at least, in excess of C$40 when the Covid situation and the airline situation normalises a bit more, ” Paul Younes, an analyst at Montreal-based Letko, said in an interview on BNN Bloomberg Television.

Air Canada was trading at C$26.90 in Toronto.

Letko is Air Canada’s third-largest shareholder with about C$690mil worth of stock, according to data compiled by Bloomberg.

Younes described it as “our firm’s most successful investment.”

The government gave the airline a secured facility at a rate of 1.5% plus the Canadian dollar offered rate, or CDOR.

A second facility, intended to finance refunds to customers, has an annual rate of 1.211%.

Air Canada will pay higher rates on three unsecured loans.

“The interest rate being attached to some of the debt is not too onerous and we think is quite fair, ” Younes said.

Some analysts were surprised by the size of the equity part of the deal.

If all the warrants are exercised, the government would wind up with 9.7% of Air Canada, according to Kevin Chiang, an analyst at Canadian Imperial Bank of Commerce.

“Frankly, we don’t like to see them as shareholders but we understand it, ” Younes said.

“The Canadian taxpayer here is putting up capital, and just like any capital provider, they are deserving of a return on that capital.” — Bloomberg

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