Major Air Canada holder endorses bailout and sees 50% upside

Letko Brosseau & Associates Inc., one of Air Canada’s largestshareholders, says the terms of the government’s rescue packageare fair and the airline’s stock could rise about 50% from current levelsonce the pandemic eases.

Canada’s largest carrier reached a deal Monday with the federal government for loans and equity worth C$5.9 billion ($4.7 billion). The company will get access to five new credit facilities; the state will buy an ownership stake of more than 5% and receive 14.6 million warrants to buy more shares.

“In spite of the dilution that we see, we still see a path for this company to be worth, at least, in excess of C$40 when the Covid situation and the airline situation normalizes a bit more,” Paul Younes, an analyst at Montreal-based Letko, said in an interview on BNN Bloomberg Television. Air Canada was trading at C$26.90 as of 3:51 p.m. in Toronto.

Letko is Air Canada’s third-largest shareholder with about C$690 million worth of stock, according to data compiled by Bloomberg. Younes described it as “our firm’s most successful investment.”

The government gave the airline a secured facility at a rate of 1.5% plus the Canadian dollar offered rate, or CDOR. A second facility, intended to finance refunds to customers, has an annual rate of 1.211%. Air Canada will pay higher rates on three unsecured loans.

“The interest rate being attached to some of the debt is not too onerous and we think is quite fair,” Younes said.

Some analysts were surprised by the size of the equity part of the deal. If all the warrants are exercised, the government would wind up with 9.7% of Air Canada, according to Kevin Chiang, an analyst at Canadian Imperial Bank of Commerce.

“Frankly, we don’t like to see them as shareholders but we understand it,” Letko’s Younes said. “The Canadian taxpayer here is putting up capital, and just like any capital provider, they are deserving of a return on that capital.”