Transat AT Inc. will borrow as much as $700-million from the federal government, a bailout that will let the Montreal-based tour and airline operator stay afloat and give refunds to customers whose flights were cancelled in the pandemic.
Transat’s announcement on Thursday, which comes after several weeks of talks with the government, includes repayable credit facilities Ottawa last year offered to large employers under a program it called Large Employer Emergency Financing Facility (LEEFF).
Additionally, Transat will issue to the government 13 million warrants, which bear the right to purchase shares in the company for $4.50 each to a maximum of 20 per cent of outstanding stock.
Transat has not flown since the end of January, and halted for four months in 2020 because of the COVID-19 pandemic. Transat has laid off as much as 85 per cent of its work force, deferred aircraft lease repayments and accelerated the retirement of several planes as it lost $497-million in 2020.
Adding to the uncertainty, Air Canada and Transat on April 2 terminated Air Canada’s $180-million agreement to buy Transat, citing insurmountable hurdles at the European antitrust regulator.
Transat chief executive officer and founder Jean-Marc Eustache said the new lines of credit will allow the company to “move forward with confidence.”
Mr. Eustache told reporters Transat takeover talks are “progressing” with another suitor, a group led by Pierre Karl Péladeau that previously offered $5 a share. Negotiations are “going well,” he said, “but we still don’t have a real proposition that we can work with.” He declined to say whether Transat has received interest from any other investors.
In a speech at the company’s annual meeting on Thursday, Mr. Eustache said the company reduced its fixed costs and is optimistic about the recovery in demand for leisure and family air travel. However, a restart of service is not expected until late June at the earliest.
The government aid comes with $1-million limits on executive pay and prohibitions on stock buybacks. In addition, Transat employed 772 people as of April 28, and must maintain that level. In good times, the company employed 5,000 people in Canada.
Including loans and credit announced earlier, Transat said its total available financing is $820-million at an average interest rate of 6 per cent.
The credit facilities announced on Thursday include:
- $78-million in credit secured by Transat assets, bearing an interest rate at the Canadian Dollar Offered Rate plus 4.5 per cent.
- $312-million in five-year credit at interest rates of 5 per cent in the first year, rising to 8 per cent in the second year, and by 2 per cent a year after that.
- If Transat repays the $390-million in the first year (the amounts above), half of the warrants issued to the federal government are cancelled.
- $310-million in unsecured credit to give refunds to customers whose flights were cancelled after Feb. 1, 2020. The credit is repayable over seven years at a yearly interest rate of 1.2 per cent.
“We believe this financing was necessary in the context of the pandemic and should enable TRZ to participate in the industry recovery,” Benoit Poirier, a stock analyst at Desjardins Securities, said in a research note.
Cameron Doerksen, an analyst at National Bank of Canada, said Transat faces several problems, including a high rate of cash expenses that will nudge leverage higher, and international travel restrictions that are not expected to be lifted soon.
“We are also doubtful that another offer for the company is forthcoming at $5 a share,” Mr. Doerksen said in a note.
Katherine Cuplinskas, a spokeswoman for Finance Minister Chrystia Freeland, said the financing ensures Transat will protect jobs and provide refunds. “This builds on the $2.1-billion the air sector has already received through the Canada Emergency Wage Subsidy, and the $1-billion announced in the fall economic statement for airports and smaller airlines,” Ms. Cuplinskas said.
In Quebec City, Premier François Legault said his government continues its own conversations with Transat and is prepared to offer financial help to the holiday provider if needed. “I have to be careful because I have an emotional attachment [to the company]. But certainly we will help.” An accountant by training, Mr. Legault worked as an auditor for Ernst & Young before entering politics and was a co-founder of Air Transat in 1986.
On April 12, the government announced a $5.9-billion aid package for Canada’s biggest airline, Air Canada. Ottawa said it will buy $500-million in Air Canada stock, or 21.6 million shares, and has the right to buy 14 million more to a maximum of 20 per cent of the company.
Spokespeople for Porter Airlines and WestJet Airlines said federal bailout talks are under way.
Transat has issued $520-million in credits to ticket buyers for flights cancelled in the pandemic and has placed 44 per cent of this amount in trust.
Transat said on Thursday that customers should apply for refunds by Aug. 26. Any customers whose flights are cancelled following a restart in service would also get their money back, it added.
People who booked with a travel agent or online company should contact them directly, Transat said.
With files from Nicolas Van Praet
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