Air Canada stock jumped as much as 12 per cent Monday on news it has struck a deal for equity refinancing, despite the fact that shares of the insolvent airline are essentially worthless.
"Why on earth would anyone buy the stock?" Gavin Graham, investment director at Guardian Group of Funds in Toronto, asked globeandmail.com.
Late Saturday, Air Canada announced that Trinity Time Investments, a company controlled by Hong Kong businessman Victor Li, will pay $650-million for a 31 per cent stake in Air Canada. The money will be used by the airline when it emerges from bankruptcy protection.
The agreement with Mr. Li will all but wipe out existing shareholders, Air Canada said in its Saturday press release, giving them a nominal 0.01 per cent of the company. That means the shares will be worth less than 1 cent each.
Air Canada has repeatedly warned investors that the restructuring process will leave its stock with little to no value.
Still, shares of Air Canada soared as high as 12 per cent on the Toronto Stock Exchange Monday, with 8.1 million shares trading hands in the first three hours of trading, compared with an average daily volume of 2.6 million shares. They finished the session up 10.2 per cent or 11 cents at $1.19.
The stock has a 52-week high of $6.29 and a low of 69 cents. It hit a high of more than $20 in early 2000.
"Based on the price paid by the Trinity Time Investments, we estimate that the current shares outstanding of Air Canada are valued at $0.0017 per share given these terms," analyst Claude Proulx of BMO Nesbitt Burns Inc. wrote Monday in a note to clients.
He maintained his "underperform" rating on Air Canada stock and recommended that investors sell it.
Montreal-based Air Canada said Saturday the deal will leave about 56 per cent of the company's fully diluted equity to creditors, who are owed more than $9-billion. The creditors will have to buy some of those shares through a rights offering, which will generate an additional $450-million for the airline.
While the deal with Mr. Li will provide Air Canada with some much-needed money, it must still subject to approvals. In addition, the airline is still facing a $1.5-billion pension shortfall.
Market watchers have been amazed to see Air Canada's stock traded so actively since it filled for bankruptcy protection on April 1. In a restructuring under bankruptcy protection, existing shareholders are not entitled to any recovery unless the company's creditors get their debts repaid in full. Air Canada's creditors are expected to see their debts paid off at a fraction of face value.
Mr. Graham said investors buy stock in bankrupt companies because they expect it will continue to be refloated.
"Probably people are confusing the new Air Canada with the old Air Canada so they think the share are going to be part of the company Mr. Li has injected with $650-million. They haven't bothered to read down two paragraphs to where it says you will get 0.01 per cent."
In a separate announcement made early on Monday, Air Canada will "repudiate" its catering contract with Cara Operations Ltd. when the airline emerges from bankruptcy proceedings later this year, Cara said in a release.
Cara said the repudiation of the catering contract with the airline was a "material adverse development" and that it is reconsidering its plan to take Cara operations private. A Dec. 15 meeting to vote on the proposal is now "unlikely" would take place, said Toronto-based Cara.
With files from Globe reporter Keith McArthur