Bondholders are unlikely to approve a financial restructuring plan proposed Canadian Airlines Corp. last week, according to one airline official.
Under the terms of the arrangement, Canadian Airlines' senior secured $175 million, 10% issue due 2005, will be reduced to $162.75 million, translating into a pay-out of only 92 cents on the dollar. However, the company's unsecured creditors, including investors in its $100 million, 12.25% senior unsecured issue due 2006, can expect a payment equal to only 12% of their total claims. Both issues carry a C rating from Moody's Investors Service.
Although creditors will vote on the proposal later this month, in an investor meeting held in New York last week, bondholders voted not to take the loss. While bondholders called the proposal inadequate, investors would not comment on how high Canadian would have to up the payment before they would approve the restructuring.
Currently, the senior secured issue is trading in the high 70s to low 80s. The securitized bonds are backed by aircrafts and other assets. J.P. Morgan, the issue's largest investor, holds approximately $40 million of the notes.
The airline, for its part, has indicated that it is willing to negotiate with investors.
"If 92 wasn't the right number, then we're still at the table with the bondholders, even up to the date of the May 26 meeting," one airline official said.
If the airline and its bondholders do not reach an agreement before that date, its acquisition by Air Canada could be delayed.
However, if a compromise can be reached and the financial restructuring plan is approved by creditors at the end of May, and receives court approval shortly thereafter, Canadian is expected to emerge as a wholly-owned subsidiary of Air Canada in June. Canadian Airlines has been under Canadian Companies Creditors Arrangement Act (a mandate that provides court protection for a company's assets while it undergoes a financial restructuring) protection since February.
The two carriers have already begun to integrate their operations. They share airport terminals and scheduling capacities, resulting in a projected savings of C$600 million to C$800 million for 2000. While their aircraft carry both company logos, they are, however, maintaining separate brand names. The integration of Canadian Airlines' and Air Canada's workforces, pending the resolution of seniority disputes within the carriers' still-separate unions, will result in an additional C$100 million to C$150 million of savings.
An improved financial situation and the affiliation of its brand name with Air Canada may boost Canadian Airlines' rating.
"We hope to capitalize on the favorable financial situation of Air Canada and hope to take up their credit rating," one company official said.
Air Canada has a senior implied rating of Ba3.