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Air Canada's High Yield Note Sale Shows Renewed Risk Demand: Canada Credit
Air Canada, the country’s largest airline, benefited from a return of appetite for high-yield debt as it sold $1.09 billion of notes denominated in U.S. and Canadian currency.
The carrier issued $600 million of five-year notes that yield 9.5 percent and C$300 million ($289 million) of debt of the same maturity that yields 10.375 percent, Bloomberg data show. The company also sold $200 million of 5.5-year debt that pays 13 percent, the data show.
Air Canada said in a statement last week proceeds will be used to repay a C$700 million term loan maturing 2014 and for general purposes. JPMorgan Chase & Co., Toronto-Dominion Bank, Morgan Stanley and Citigroup Inc. managed the sale.
“Risk appetite is back on now, and they’re coming to market at a timely moment -- it’s a decent piece of paper for those who can bear the risk,” said Ric Palombi, a portfolio manager in Calgary at MacLean & Partners, which oversees more than C$1 billion. Palombi didn’t participate in the sale.
The notes bring total high-yield debt sales in Canada so far this year close to the record C$1.8 billion reached in 2007, said Robert Follis, head of corporate research at the Bank of Nova Scotia. Companies including RTL-Westcan LP and Garda World Security Corp. are among issuers that have sold C$1.5 billion of high-yield debt in 2010.
“Seeing the appetite for this deal is indicative of two things, one is that the market is definitely looking for yield, and two we haven’t had a lot of issues in Canada recently,” Follis said. “This is tapping into both aspects: there is a very high yield on this issue and there is money to be put to use for the right name at the right spread.”
Better Results
The debt sale came a week after Montreal-based Air Canada released preliminary second-quarter results showing its earnings before various items will surge to as much as C$340 million from C$135 million in the same quarter of 2009. The company will release official results Aug. 5.
The yield spread investors demand to own high-yield Canadian debt rather than risk-free government debt has fallen to 573 basis points, or 5.73 percent, yesterday, from 698 points on Jan. 4, according to a Bank of America Merrill Lynch index.
Elsewhere in credit markets, the extra yield investors demand to own Canadian company debt rather than federal government fell to 142 basis points yesterday, according to a Bank of America Merrill Lynch index.
Canadian Imperial Bank of Commerce plans to sell $1 billion of covered debt in a benchmark reopening of two issues, according to a person familiar with the transaction. The bank plans to reopen its 2 percent notes due 2013 and 2.6 percent notes due 2015, each for at least $250 million, said the person, who declined to be identified because terms aren’t set. A benchmark offering is usually at least $500 million.
Historic Flight
DBRS Ltd. confirmed Canada’s AAA rating, saying that “while still challenging, Canada’s fiscal position remains the envy of many developed nations and its strong credit profile is supported by a manageable debt burden.”
Air Canada was publicly listed in 2006, after its then parent ACE Aviation Holdings Inc. restructured under bankruptcy protection. The company said the debt will be secured by accounts receivable, real estate interests, spare engines, airport slots and other assets.
“This deal is a deal that people got comfortable with because of the collateral involved,” Palombi said. Still, “Air Canada’s history has been difficult. In a downturn, that collateral can go down in value very quickly, so this bond is not for the faint of heart.”
‘More Comfort’
Moody’s Investors Service assigned the notes a rank of B2, five levels below investment grade, and Standard & Poor’s graded them B+, one step higher, according to separate reports. S&P said it was considering whether to upgrade Air Canada’s CCC+ corporate credit rating.
“It gives me a lot more comfort on the financial-risk side,” said Walter Spracklin, an analyst with RBC Capital Markets, who rates Air Canada’s shares as outperform. “They’re retiring C$700 million with C$900 million, so that puts C$200 million extra on the balance sheet, and it’s being done at significantly lower costs of financing” than the previous borrowing, which had a rate of about 13 percent.
Spracklin said he has a C$5 target for Air Canada, from yesterday C$2.34 4 p.m. close in Toronto trading. Five analysts including Spracklin recommend buying the shares, one is “neutral” and the other expect Air Canada to “market perform.”
To contact the reporter on this story: Alexandre Deslongchamps in Ottawa at adeslongcham@bloomberg.net.
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