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ACE cleared for windup as Air Canada completes financing

Air Canada

Timothy Stake/CNW Group

Air Canada has completed a debt refinancing package totalling more than $1.1-billion, strengthening its balance sheet as investors brace for ACE Aviation to jettison shares in the airline.

ACE owns 75 million Air Canada shares, or a 27-per-cent stake, and the winding down of the holding company will likely lead to a share distribution that raises the public float of the airline, industry experts say.

Air Canada will release its second-quarter financial results on Thursday, but "the interesting part will be what ACE is going to do," PI Financial Corp. analyst Chris Murray said Tuesday.

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ACE, created in 2004 after Air Canada emerged from bankruptcy protection, spun off various units over the years, notably Groupe Aeroplan Inc., Jazz Air Income Fund and Air Canada Technical Services, now called Aveos Fleet Performance Inc.

Montreal-based ACE participated in a financial rescue package for Air Canada in the summer of 2009, lending $150-million to the carrier, strapped for cash at the time. With the loan taken off the holding company's books, ACE chairman Robert Milton will finally be in a position to close up shop, said Rick Erickson, an aviation consultant who heads RP Erickson & Associates.

"The loan repayment by Air Canada is a large, positive step forward in the dissolution of ACE," Mr. Erickson said. "ACE has been an entity far longer than anybody, including Robert Milton, would have anticipated at its startup."

With ACE owning Air Canada shares for almost six years, the "overhang" on the carrier's stock has served as a "brake on the value of Air Canada stock," Mr. Erickson added.

While ACE officials didn't return calls for comment, Air Canada's closing of the private offering of senior secured notes frees ACE to embark on its long-awaited shutdown, possibly distributing cash and Air Canada stock to existing ACE shareholders.

The airline's debt offering carries interest rates ranging from 9.25 per cent to 12 per cent, an improvement over the previous loan package reached last summer at a 12.75-per-cent floating rate, Mr. Murray said.

He estimated ACE's net asset value at roughly $11.50 a share, reflecting $6.25 in cash and 2.39 Air Canada shares for every ACE share.

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Mr. Murray raised his second-quarter revenue estimate for Air Canada to $2.61-billion from $2.49-billion, and boosted his forecast for EBITDAR (earnings before interest, taxes, depreciation, amortization and aircraft rent) to $331-million from $217-million.

Air Canada's brightened picture comes as the global airline industry recovers from a brutal 2009.

The International Air Transport Association (IATA) said its sampling of 11 U.S. carriers showed nearly $1.5-billion in profit for the second quarter, compared with $500-million in losses in the same period last year. "The early signs are encouraging, with both Asia and Europe moving into operating profits," IATA added.

Still, IATA cautioned that airlines will need to carefully manage their seat capacity, taking into account whether demand growth slows in the second half of 2010.

Halifax-based Jazz, which flies regional routes on behalf of Air Canada, reported Tuesday that its second-quarter profit slipped 38 per cent to $15.6-million, in part because it has been charging lower rates to Air Canada and fuel costs rose.

Calgary-based WestJet Airlines Ltd. also releases its quarterly report Thursday. Mr. Murray raised his second-quarter EBITDAR estimate for WestJet to $134.6-million from $100.9-million.

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