Air Canada markets junk-bond portion of $5.4 billion refinancing

Air Canada has started the marketing of high-yield bonds in U.S. and Canadian dollars, the largest portion of its $5.35 billion refinancing announced last week.

Canada’s biggest carrier plans to raise approximately $2.75 billion by issuing senior secured bonds maturing in five and eight years, the Montreal-based company said in a statement Monday. An investor call is scheduled for later Monday and the deal is expected to price July 28, according to people familiar with the sale.

The transaction would be Air Canada’s first major bond sale after getting a federal bailout package in April consisting of loans and equity worth nearly C$5.9 billion ($4.7 billion), making the government a shareholder for the first time since the 1980s. In May, the company issued an $84 million sinkable bond, which was rated by Fitch Ratings at the lowest investment grade.

The new bonds are expected to be rated two and three levels below investment grade by Moody’s Investors Service and S&P Global Ratings respectively, said the people, who asked to not to identified because the deal details are not public. The bond portion of the refinancing is coming one week after banks started offering a $2 billion secured term loan for Air Canada at around 400 basis points over the London interbank offered rate. The refinancing also includes a $600 million revolving credit facility

Air Canada’s proposed financing is secured by the airline’s international slots, gates and routes, or SGR, with a combined appraised value of about $12 billion, according to S&P Global Ratings, which grades the secured loan at the same credit rating as the bonds to be issued. The company plans to use the proceeds from the transactions to refinance the company loan signed in October 2016 as well as repaying its 4.75% senior secured notes due 2023 and 9% second lien notes due 2024. The new revolving credit facility will be used to fund the company’s working capital and other general purposes.

The airline is bringing the high-yield portion of the offering as investors are weighing the strength of the global economic recovery. The risk spread of a Bloomberg Barclays index group junk rated corporate bonds in U.S. dollars was at 2.88% Friday, tighter than the 3.03% last Monday, which was the widest level since late May.