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Apr 29, 2021

Transat rises as Canada grants $700M in crisis loans

Transat receives $700M loan from federal government

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Transat AT Inc., the Montreal-based vacation operator that Air Canada gave up trying to buy earlier this month, obtained $700 million in emergency aid from the Canadian government to stay afloat during the pandemic.

The company took loan facilities of $390 million for operations and another $310 million to finance customer refunds for flights canceled during the pandemic. Transat will also issue 13 million warrants to the government to buy shares at $4.50 each.

Transat shares jumped on the news, rising as much as 13 per cent in Toronto, before paring some of the gains. They were up 4.4 per cent to $4.73 as of 12:59 p.m.

The deal follows a $5.9 billion rescue package for Air Canada two weeks ago, reflecting Prime Minister Justin Trudeau’s case-by-case approach in supporting the industry. It helps Transat, which announced the suspension of all regular flights on Jan. 29, buy some time in the hope that COVID-19 vaccinations can salvage the summer travel season.

 “With this support, we now look forward to resuming operations as soon as safe travel is possible and travel restrictions can be lifted,” Chief Executive Officer Jean-Marc Eustache said in a statement. “We will then be able to implement our plan to make Transat a solid and profitable company once again, one that will continue to symbolize leisure travel for its many customers in Quebec and elsewhere.”

Unlike the Air Canada bailout, the government isn’t buying shares right away. Transat Chief Financial Officer Denis Petrin told journalists that wasn’t on the table during negotiations. But the warrants may still mean dilution of as much as 25 per cent for existing shareholders.

The government doesn’t get all the warrants immediately. They’ll vest as the company draws down the loans. If Transat can repay the money in full in the first year, half of the warrants will be canceled.

Still, Transat would like to improve its borrowing costs and is planning to seek help from the Quebec government, which wanted to see federal aid come first before intervening, executives said.

Peladeau offer

Canada has barred most foreign travelers from entering the country since last March and has quarantine rules for non-essential workers. Transat, which sells vacation packages to Canadians visiting sun spot destinations in winter and European cities in summer, was hit particularly hard in January when Trudeau asked carriers to halt travel to Mexico and the Caribbean to slow the spread of new variants of the virus.

The plan includes restrictions on dividends, stock repurchases and executive compensation and a pledge to keep active employment at current levels. It comes in addition to $120 million in existing credit facilities.

As of April 22, government financing for the airline industry globally, including loans and equity stakes in exchange for cash, has totaled more than US$189 billion, according to Ishka Ltd., a London-based aviation finance and investment consultancy.

Canada’s latest aid package also removes the urgency for Transat to find a new buyer. Air Canada dropped its takeover because it couldn’t convince European regulators to approve it. Quebec media and cable executive Pierre Karl Peladeau has been urging the company to consider his offer of $5 a share.

Peladeau has maintained his interest but there’s no firm and binding offer yet, according to Eustache. “We are continuing discussions, to get to a formal offer at some point,” he told reporters. “The talks are going very well.”