AC creditors mull legal action:

[Mitch Cronin]

Air Canada creditors mull legal action over lush payouts

By KEITH McARTHUR

TRANSPORTATION REPORTER

Tuesday, November 11, 2003 - Page B1

Air Canada's creditors and unions -- livid over generous retention bonuses proposed for the airline's top executives -- are debating whether to go to court to stop the stock payouts.

As part of his tentative deal to become the airline's controlling shareholder for $650-million, Hong Kong businessman Victor Li will, over the next four years, give 1 per cent of the company's shares to each of chief executive officer Robert Milton and chief restructuring officer Calin Rovinescu.

Based on the price Mr. Li is paying for his investment, the retention bonuses are worth about $21-million.

The value of the payout would rise or fall with the company's stock price.

"There's no incentive for any individual creditor to fight this fight on their own," said a person close to some creditors.

"It will be up to the Unsecured Creditors Committee to decide whether to have the fight on behalf of the class . . . and it will be up to the unions as to whether they want to have the fight on behalf of the unions or not."

Both groups are furious at the size of the proposed retention bonuses, and the fact that the executives were involved in selecting Mr. Li as the airline's equity partner.

Air Canada said it was Trinity Time Investments, a company controlled by Mr. Li, that insisted on paying the retention bonuses because he believed that only the current executives were capable of delivering on their restructuring plan. The airline said the other equity finalist -- Cerberus Capital Management LP -- proposed a similar management retention bonus.

Air Canada spokeswoman Priscille Leblanc said Mr. Milton abstained from the board of directors' vote that selected Mr. Li's offer.

Mr. Rovinescu is not on the board.

Bill Alderman, who runs a New York investment bank specializing in aerospace and defence, said it is not unusual for executives to get large payouts -- usually in the form of stock options -- when companies emerge from restructurings.

He said the retention bonuses have a "bad odour" to them because they are a direct grant. But he said Mr. Milton and Mr. Rovinescu have done a good job in the restructuring and are probably worth whatever they are getting paid.

"I fault them [Air Canada] on the way they've handled the public relations, but I don't fault them on the economics because the economics -- although they're outlandish -- that's the market," said Mr. Alderman, president of Alderman & Co. LLC.

Mr. Alderman said New York creditors are upset that the executives have been able to remain in charge of the company during the restructuring. He said it raises questions in their minds about whether they got the best equity deal for creditors.

"My personal view is that the new equity and the bondholders had very little say in the management team or that team's compensation package," he said.

"Had this been a normal free-market, Wall-Street-preferred type of restructuring, management would have been ousted and new management would have been selected in a free market. They probably would have been given similar upside, but it wouldn't have left a bitter taste in everybody's mouth."

Mr. Alderman pointed out that Gordon Bethune, the chairman of Continental Airlines, has received tens of millions of dollars worth of compensation from stock options and restricted shares he received when Continental emerged from protection under Chapter 11 of the U.S. Bankruptcy Code in 1994.

Air Canada is expected to submit the equity deal for court approval over the next few weeks.

At that time, the airline's creditors and unions will have a chance to argue that Mr. Justice James Farley of the Ontario Superior Court should block or reduce the management retention bonuses.

Murray Gold, a lawyer for the Canadian Union of Public Employees, said he expects there to be legal consequences when the deal goes for court approval.

"Where I grew up, when someone asked someone else to make sacrifices, they make those sacrifices themselves. I think [the retention bonuses are] going to go down extremely badly with the tens of thousands of employees who are being asked to make significant sacrifices to modest incomes."

In addition to the retention bonuses, the airline is setting aside 5 per cent of the airline's shares for management stock options.

One creditor, who asked not to be named, said he agrees with the stock options, but said he's concerned that too much is going to the airline's top two executives.

"The lion's share of that equity shouldn't go to the two guys leading the company," the creditor said.

He said he expects Air Canada's stock to soar after the company emerges from protection under the Companies' Creditors Arrangement Act, which could make the payout to the executives balloon fourfold.

"If the valuations for Air Canada even approach what the U.S. and European carriers are trading at, these guys are going to be worth between $75-million and $100-million," he said.

Creditors say they expect that if they challenge the payouts, Air Canada will argue that without the retention bonuses, there will be no bid from Mr. Li, and without Mr. Li there is no restructuring.

Meanwhile, Nav Canada announced yesterday that it sold its accounts receivable from Air Canada and its subsidiaries. The not-for-profit company, which runs Canada's air navigation system, was owed $45-million by Air Canada when it filed for protection on April 1. Nav Canada said it sold the trade debt for $13.2-million, or 29 cents on the dollar. Air Canada's bonds were trading yesterday at about 35 cents on the dollar, roughly the same value as last Friday.

Some time next year, the company's creditors will get a chance to vote on the equity deal as part of a plan of arrangement.

Before it can emerge from bankruptcy protection, Air Canada must also reach an agreement with its unions and the federal pension regulator on how to deal with a $1.5-billion liability in its plans. Mr. Li's offer is conditional on the pension problem being resolved in a satisfactory manner.

The airline must also finish restructuring its aircraft leases and contracts with suppliers.

[Guest Patrick Bergen]

"Bill Alderman, who runs a New York investment bank specializing in aerospace and defence, said it is not unusual for executives to get large payouts -- usually in the form of stock options -- when companies emerge from restructurings."

I guess my point would be if Milton does an awful job and the stock drops in half over the next 4 years then he still makes 10 million on top of a large salary. If it is options then it is more closely aligned with the success of Air Canada. IMHO

[dagger]

Either Air Canada makes real profit and the stock goes up, or it will probably go out of business. There is not a ten year cushion for this thing. There is no middle ground because the asset base will not be that large. Milton will either do well or he will preside over the final days of the airline.

[Guest Patrick Bergen]

But can't that be accomplished with options instead of a grant of shares?

[Guest Geminoid]

But these are Li's personal shares. Can't he do with them as he pleases?

Geminoid

[dagger]

Precisely. Call this Li's priviate services agreement with Milton. I hope Milton makes a fortune off of his shares, because they will only be worth a fortune if every other share is worth a good deal. And if that's the case, profit sharing is going to kick in and the next round of contract negotiations will return better increases/improvements. Air Canada will quickly make up its pension deficit, probably ahead of schedule and irrespective of stock market conditions.

To me, the stock is no more a sure thing as a vested full share than as an option because Air Canada won't be around in four years if it doesn't make money in that time period. Moreover since the stock vests over four years, Milton cannot make a quick killing when the company comes out of CCAA. It will begin vesting after we see a year's financial performance. If things go sour, it could end up worth as much as unexercised options, i.e., nothing.

[Guest M. McRae]

In my opinion, the full disclosure of the deal with Milton is refreshing and bodes well for the provision of information in the future. Who knows, we may even see two very strong airlines in Canada in the near future. (Y)