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In addition to the statutory nationality limitations, Air Canadas man agement sought a stable, long term financial shareholder that would acquire effective control but confine its interventions to financial per formance rather than operational matters. Several US vulture capital firms were interested, but management feared these as short term in vestors who might strip assets, flip shares to other undesirable inves tors at the earliest opportunity, or impose difficult conditions on or even replace management. One of Air Canadas lawyers, Calin Rovinescu of the distinguished Montreal legal firm Stikeman Elliott, knew the Li family of Hong Kong, which already had substantial investments in Canadian oil and real estate. Both of Li Ka Shings sons had Canadian citizenship, meaning that a Li bid would not be contingent on changing Air Canadas governing legislation, which set a limit of 25 percent on foreign owner ship. Rovinescu joined Air Canada as Robert Miltons second in com mand and chief restructuring officer.

In the event, Victor Lis Trinity Time Investments Inc. became a bid der for the new Air Canada equity, offering $650 million for 31 percent of the reorganized airline and leaving 56 percent available to the com panys creditors, who would have to pay $450 million in new cash.

Deutsche Bank (DB) guaranteed to buy any of the 56 percent not taken up by the creditors, at a premium of 15 percent. Outside the deal struc ture itself, Victor Li offered Rovinescu and Milton retention bonuses of about $21 million each.

There were other offers, in particular from Cerberus Capital Man agement LP, a US based vulture fund. Either offer would provide Air Canada with new cash equity of $1.1 billion. On November 8 2003, Air Canada announced it had selected the Li bid.

Cerberus countered with a sweetened offer, but one that was out side the rules for the bidding process that Air Canada had previously imposed. Its key feature was significantly improved creditor recovery, as the only voters in this election were to be offered $850 million of new shares, with Cerberus guaranteeing to buy any not subscribed for at a premium of 20 percent. In terms of the original auction criterion, Cer berus would be paying $650 million for only 25 percent of the equity, though its guarantee meant that there was a possibility that the US firm would wind up owning more than the 25 percent the law allowed. The offer was also crafted to appeal to Air Canadas unions by proposing to pay down the unfunded liabilities in the pension plan more quickly. But Air Canadas top executives would not be offered immediate retention bonuses242. Financial market commentators estimated that the Cer berus offer would improve creditor recoveries by 9 to 16 percent. Air Canada restated its preference for Trinity Time on grounds of lower execution risk no changes to the policy regarding foreign ownership would be required thus setting the stage for a series of decisions by the court243. Judge Farley had approved the November 8 selection of Trinity Time but made allowances for best and final offers by both par ties by a fixed deadline. An appeal by a creditor was dismissed, with the Keith McArthur, Rival Air Canada bid sees more for creditors, Globe & Mail, 25 Nov.

2003, B1.

Keith McArthur, Air Canada seeks rapid approval, Globe & Mail, 26 November 2003, B7.

Court of Appeals strongly supporting the management of the case by Judge Farley.

Mr. Justice Farley also approved an anomalous side deal over the objections of a group of unsecured creditors. Air Canada either had to renew its lucrative code sharing arrangement with Lufthansa, including guaranteeing priority repayment of $300 million owed to Lufthansa, or face an immediate and complete cut off of a crucial element in its long term recovery plan. Despite the principle that creditors should be treated equally, Judge Farley approved the deal, remarking only that it should not become an accepted practice244.

On 22 December 2003, Air Canadas board once again chose the Trinity Time offer, in part because in the interim back up arrangements had been struck not just with DB but also with GECAS, which improved creditor recovery by about 15 points245. Dissident creditors tried to ar range a marriage of the best features of the Cerberus offer and the DB GECAS back up arrangements, but failed. Both offers were highly complex, depending as they did on a variety of actions by other parties by specified times as well as on a number of assumptions about the fu ture of the airline business in Canada, and were thus technically difficult to value precisely. In the end, it was the unwillingness of DB and GECAS an affiliate of GE Capital Corporation, whose GE Canada Finance Hold ing Co. was the provider of $954 million in debtor in possession financ ing to be separated from Trinity Time that left theirs the only bid standing. The Courts final approval, despite much creditor grumbling and legal manoeuvring, left it the sole choice available. With the support of the monitor behind the Trinity Time bid, creditor opposition subsided by mid January 2004246. With the equity issue ostensibly settled, atten tion turned to labour issues.

The first to surface was the $1.4 billion shortfall in the pension ac count. The unions and the federal pension regulator, the Office of the Superintendent of Financial Institutions (OSFI), both wanted the short fall to be repaid within the regulatory maximum of 5 years. Air Canada Paul Waldie, Air Canada, Lufthansa deal approved despite objections, Globe & Mail, 18 December 2003, B20.

Keith McArthur, UCC fights Air Canada monitor, Globe & Mail, 7 January 2004.

Keith McArthur. Air Canada creditors drop bid opposition, Globe & Mail, 16 January 2004, B1.

management needed the cash for investment. A compromise was reached on 10 years, but the compromise did not include OSFI.

During these negotiations, a rogue issue suddenly arose. Trinity Time said that as a condition of its investment it wanted the unions to switch from defined benefit to defined contribution pension plans247.

The unions, which had in principle given up $1.1 billion a year in em ployees wages and benefits, balked. An arcane issue became a deal breaker. After seven weeks of furious bargaining, supervised by the Court, Victor Li withdrew his bid.248 Four days later, Calin Rovinescu re signed.

In addition to this central blow to Air Canadas restructuring plans, other distractions arose. The federal Minister of Transport chose this moment to state publicly that the government would not bail out the company249. Air Canada, alleging that a WestJet executive who had for merly worked for Air Canada had systematically stolen flight manage ment and fare planning information from an Air Canada intranet, sued WestJet for damages250. And the Greater Toronto Airports Authority (GTAA), unveiling losses stemming from lower than expected passen ger traffic (as well as its grandiose construction program) set the stage for much higher landing fees at Air Canadas hub airport251. The ever helpful GTAA also attempted to renege on an agreement about gate access.

Under defined benefit plans, the company is ultimately responsible for ensuring that there are sufficient funds to pay specified nominal pension amounts. Employer and em ployee contributions may be varied to take account of changing economic conditions and the investment performance of the pension fund. The contingent liability to the company may be large, which means that the underlying assumptions and the eventual payouts tend to be conservative. A defined contribution plan takes in fixed contributions from em ployers and employees, with the amounts eventually paid to pensioners wholly dependent on the performance of the fund in the interim. It is quite improbable, but not impossible, for employees to wind up worse off in this case. But the idea that pensioners should take any risk, however small, no matter how large the potential reward, was simply unaccept able to the unions, who felt strongly that fund management risks should be borne by the employer or guaranteed by the state.

John Partridge, Paul Waldie, Andrew Willis and Simon Tuck, Li walks from plan to res cue Air Canada, Globe & Mail, 3 April 2004, A1; Janet McFarland, Many good reasons the Li deal didnt fly, Globe & Mail, 3 April 2004, A4.

Murray Brewster, Air Canada flying solo, Valeri says, Globe & Mail, 13 April 2004.

Paul Waldie, WestJet banned from using information, Globe & Mail, 16 April 2004.

Richard Bloom, GTAAs loss more than triples in 2003, Globe & Mail, 16 April 2004.

Despite these distractions, intense negotiations with Air Canadas remaining financiers followed. DB made the key move, continuing with its offer to take up $450 million and extending this to a guarantee to purchase any of a further $400 million not taken up by creditors (though at a reduced premium of 7.5 percent). A further $250 million would be dealt with later. Other parties made accommodations to spread the risk.

The government announced that it would allow a rise in foreign owner ship to 49 percent and would contemplate limiting the rent increases demanded by unaccountable airport authorities. OSFI reluctantly agreed to the ten year plan for making up the unfunded liabilities in the pension plan. GE Capital Corporation agreed to continue with its offer of $1.8 billion to finance new aircraft once the airline emerged from credi tor protection. But both GECAS and DB imposed a requirement for a $200 million annual cut in labour costs on top of the $1.1 billion reluc tantly agreed but not fully implemented by the unions in 2003, and set demanding time limits on the negotiations and subsequent steps252.

With a positive recommendation from the monitor, the Court speedily approved the new plan253. The stage was thus re set for the final battle:

the wresting of the remaining concessions from the unions.

Several weeks of intense and occasionally histrionic bargaining fol lowed. Again, the Court declined to impose a settlement. At one point, Mr. Justice Winkler ordered the Air Canada president and the head of the most recalcitrant union to meet and negotiate personally, in meet ings he would chair. The required $200 million was apportioned to each of the seven unions involved and agreement finally reached on May 20, subject to ratification votes by members254. The management group, including chief executive Robert Milton, also took salary cuts. Although a number of other events had to take place according to a demanding Keith McArthur, John Partridge and Simon Tuck, Deutsche Bank to share bailout risk, Globe & Mail, 26 April 2004, B1; John Partridge and Keith McArthur, GE Capital extends Air Canada loan deadline, Globe & Mail, 30 April 2004.

Canadian Press, Air Canadas plan to find new investor gets thumbs up, Globe & Mail, 1 May 2004.

John Partridge and Paul Waldie, Hargrove and Air Canada finally cut a deal, Globe & Mail, 21 May 2004, A1. Details of the final apportionment are in John Partridge, Air Canada faces new series of critical deadlines, Globe & Mail, 22 May 2004, B5.

schedule over the spring and summer255, these hard fought labour ne gotiations broke the back of the restructuring. The end result was fore cast to be a decline in labour costs from $3.1 to $2.0 billion, in aircraft leases by $100 million from $1.1 billion, in supplier costs from $3.1 bil lion to less than $2.8 billion, and with interest payments drastically re duced from the 2002 level of $290 million256.

On June 23, a deal with an affiliate of Cerberus Capital Management LP was announced regarding the final $250 million of new equity257. Cer berus will get convertible preferred shares with a stock dividend of percent, meaning that its initial 9.2 percent of the companys equity will grow to 12.3 percent in seven years, when Air Canada can require its conversion to common. Cerberus gets three seats on an 11 member board to Deutsche Banks four.

These cuts will still leave the company with costs per seat mile sub stantially above those of WestJet and other discount airlines258. It will take some time to see whether, in a period of strongly rising fuel prices and continued terrorist threats, all of the present players in the Cana dian airline market will survive.

Public policy issues There were a number of public policy issues external to the insol vency of Air Canada itself that affected the actions taken by the federal government and thus the calculus of each of the creditors and unions involved.

Ownership. Under the Air Canada Public Participation Act, R.S.C.

1985, the statute under which Air Canada was privatized, non residents were not permitted to own more than 25 percent of the shares of the The main steps are: arranging for a final $250 million equity tranche (June 23), drawing up a final plan of arrangement (June 30), union ratification votes (July 9), creditor ap proval (August 15), and emergence from protection under the CCAA (September 30).

Keith McArthur, Cuts take harsh toll on Air Canada employees, Globe & Mail, 21 May 2004, B1.

John Partridge, Air Canada strikes funding deal with Cerberus: U.S. vulture fund to invest $250 million, Globe & Mail, 24 June 2004, B1.

In the fourth quarter of 2003, with the bulk of the labour cost savings but not the advan tages of the reconfigured fleet factored in, Air Canada was reported to face cost per seat mile of 18 cents, against 10.4 cents for WestJet, its principal domestic discount rival.

Derek DeCloet, Air Canada creditors deserve shot in cockpit, Globe & Mail, 28 April 2004.

company. In terms of any potential future restructuring, this was the most onerous of the clauses that separated Air Canada from run of the mill companies. It was the rock on which the proposed Onex American Airlines takeover of CAIL foundered, and it complicated the search for new equity investors during the period of reorganization un der the CCAA. Other conditions included the obligation to continue to provide services in both of Canadas official languages, to maintain re pair and overhaul bases in Winnipeg, Montreal and Toronto, and to maintain the head office of the corporation in Montreal.

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