Air Canada enters negotiations for funding with two investors

By Carlise Newman

Chicago, Sept. 26 - Air Canada has selected two investors for talks on providing liquidity to execute its business plan. The airline will enter into negotiations with Cerberus Capital Management LP, and a company controlled by Victor T.K. Li, a Canadian citizen with global business interests, based upon their proposed letters of intent, which would give unsecured creditors an estimated 40% to 65% of the company's equity.

Both proposals address Air Canada's minimum C$700 million target of new equity and each also contemplates co-investment by creditors through a rights offering which would increase total proceeds to C$1 billion, the airline said.

"Ultimately we determined that the proposals submitted by Cerberus and Mr. Li were the most closely aligned to Air Canada's requirements for a successful emergence from CCAA [Companies' Creditors Arrangement Act] and the execution of its business plan going forward," said Robert Milton, chief executive officer.

Both proposals have been structured taking into account the Canadian ownership requirements governing the Montreal-based airline and do not require any change of legislation for implementation.

In both cases, along with the closing of the bidder's equity investment, rights will be offered to all creditors of Air Canada and those subsidiaries under CCAA protection to acquire new shares of Air Canada on the same economic terms as the bidder.

Some of the rights will be underwritten by the investor together with other underwriters and standby purchasers, as decided by the company and the bidder it eventually selects as equity plan sponsor. The amount to be made available under the proposed rights offering exceeds C$350 million. The rights are expected to trade in the public markets.

Air Canada has agreed to reimburse each of the short-listed potential sponsors for costs related to negotiating and finalizing documentation. The selected bidder, after execution of the investment agreement, would become entitled to customary fees.

Based on the proposals, unsecured creditors including bondholders and other financial institutions, with total estimated claims in the range of C$8 to C$10 billion, will receive an estimated 40% to 65% of the equity, depending upon the total size of the equity raised and the extent to which unsecured creditors take up the rights offering.

Existing shareholders will receive minimal, if any, consideration for their shares.

On July 16, Air Canada announced the start of an equity solicitation process, facilitated by its financial advisor, Seabury Securities LLC of New York and overseen by the court-appointed monitor, Ernst & Young, Inc.

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