Air Canada boosted the size of the loan portion of its US$5.35 billion refinancing, giving the carrier more flexibility to reorganize its borrowings once operations go back to normal.

Canada’s biggest airline increased the secured term loan to minimum of US$2.5 billion, up from the US$2 billion planned when banks started marketing the transaction last week. The upsized loan may speak to Air Canada’s intentions to delever its balance sheet because it’s repayable after one year, said Geof Marshall, who runs the fixed-income team at CI Global Asset Management’s Signature Global Asset Management and was invited to take part in the offerings.

“I take it as a positive for lenders,” he said. Air Canada will have flexibility to pay down debt as travel normalizes because the loan is callable after one year at a price of 102 and also allows for partial repayments, according to Marshall. The bond portion of the refinancing - currently offered in the U.S. and Canadian high-yield dollar markets - only can be called after 5 and 4.5 years.

A representative for the Montreal-based company didn’t respond to a request for comment.

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

There’s strong demand for floating-rate borrowings as investors weigh the global economic recovery, while the trajectory of benchmark rates could also partly explain the upsizing of the loan portion, said Marshall.

Air Canada is tightening the margin it offers on the loan to a range between 350 basis points to 375 basis points over the London interbank offered rate, which compares with 400 basis points offered last week, according to people familiar with the matter.


Record bond

The airline also plans to issue at least US$1 billion of 5-year bonds at a yield between 4 per cent and 4.25 per cent, and a minimum of $1.5 billion of 8-year bonds callable after 4.5 years which would be priced 75 basis points above the U.S. bond portion, said the people familiar with the matter.

The Canadian-dollar tranche is on a path to be the largest ever junk-rated bond in the currency, according to data compiled by Bloomberg. So far the biggest loonie-denominated bond with a credit rating below investment grade has been Air Canada’s $840 million of 9 per cent bonds - which will be repaid with the proceeds of the new borrowings - and Videotron’s $800 million of 4.5 per cent bonds issued in September 2019.

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 US$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 per cent senior secured notes due 2023 and 9 per cent 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 refinancing also includes a US$600 million revolving credit facility, the company said last week. The new bonds and loans are expected to be rated two and three levels below investment grade by Moody’s Investors Service and S&P Global Ratings respectively.