AC Creditors

[Guest flyersclub]

Airline's creditors may trump GE offer

Three German firms on prowl

Would need to convince judge

RICK WESTHEAD - BUSINESS REPORTER

Three of Air Canada's unsecured creditors are considering whether to offer the insolvent airline financing to beat General Electric Co.'s $700 million (U.S.) debtor-in-possession loan.

In order to set aside GE's loan, Bayerische Landesbank Girozentrale, Kreditanstalt fuer Wiederaufbau (KfW), and Deutsche Lufthansa AG would need to offer Air Canada terms that its bankruptcy court judge deems more attractive than those offered by GE, said a person familiar with the situation.

Besides offering rates that airline consultants say are "very friendly" to Air Canada, General Electric is charging the airline $40 million in fees for the loan. The loan was arranged through what banks call debtor-in-possession financing, meaning General Electric may be given preference over other lenders in recovering its money.

General Electric gave Air Canada favourable lending rates because it wants to prevent the airline from returning its aircraft. Air Canada leases 14 Airbus and eight Boeing jets worth a combined $724 million ($1.05 billion) from GE Capital Aviation Services Inc. Bayerische Landesbank and other creditors may mount a challenge because they want to try to protect their outstanding loans and lease agreements with Air Canada.

"Normally, there isn't a bidding war for DIP loans, but maybe the other creditors see the loan to Air Canada as a profitable, standalone deal," said Jaime Infante, who managed aircraft leases for American Express and is now an airline consultant with AvCap Partners LLC.

Bayerische Landesbank and KfW, two of Germany's largest banks, are considering a challenge to General Electric because they can't afford to write off their investment in Air Canada.

Munich-based Bayerische Landesbank is already planning to cut about 700 of 6,300 jobs as part of a restructuring after it lost as much as 1.5 billion euros ($2.37 billion Canadian) in bad loans last year.

The state-owned bank was among the largest lenders to Kirch Holding GmbH, the insolvent German media company, and was also one of the main lenders to bankrupt German regional jet maker Fairchild Dornier.

Bayerische Landesbank has helped raise financing in Europe for new Air Canada planes since at least 1995 and, along with Lufthansa, helped bankroll Air Canada in 1999, when it fought a hostile takeover from Onex Corp.'s Gerald Schwartz.

KfW, meantime, is among Europe's largest airline leasing companies and, earlier this month, joined Airbus SAS and two other lenders in setting up an Ireland-based plane financing unit called Avion Capital Ltd.

In November, KfW agreed to allow UAL Corp.'s United Airlines to delay $500 million in debt payments until 2007.

An Air Canada spokesperson declined comment, as did spokespersons for the three German lenders.

While many creditors would like to oust a DIP lender, it's rare that it actually happens, said Bill Rochelle, a partner with New York law firm Fulbright & Jaworski, which specializes in airline bankruptcies.

"There aren't a lot of banks left that have the ability to make loans that are large enough to satisfy an airline's (needs)," Rochelle said.

"But if you can get it done, it gives you a seat at the table and more influence over the airline's future."

While it would be unusual for General Electric to be replaced as Air Canada's DIP lender, it wouldn't be the first time it's happened in a bankruptcy proceeding.

Three years ago, for instance, Golden Ocean Ltd., a crude oil and dry bulk shipping company with $881 million in assets and $880 million in debt, was granted protection from creditors and arranged for financing with Greece's Bentley Investments S.A.

Eight months later, however, Frontline Ltd., the world's largest operator of super tankers, obtained the approval of the bankruptcy court to replace Bentley as the DIP lender, paying Bentley the outstanding balance on its loan, plus interest, fees and expenses.

[Maverick]

"Bayerische Landesbank and KfW, two of Germany's largest banks, are considering a challenge to General Electric because they can't afford to write off their investment in Air Canada."

Does this not imply that the reason they are doing this is to ensure that they will have first crack at the assets if the AC situation deteriorates further ie: liquidation? I am not attempting to rabble rouse here but this doesn't appear to be a magnanimous gesture by a couple of philanthropothic organizations.

[Guest jimmy]

Let's think about this. To oust GE you'd have to bring more than $1.05B Can. in cash to the table. Probably considerably more. Also, you'd have to make it a much better deal in the eyes of the judge to get him to change his mind. Remember, the point of CCAA is a restructuring of the company in order to emerge as a viable concern.

If it was to get first dibs on the bones in a liquidation you'd have to have more than $1.05B Can. at stake. Probably a lot more to warrant the risk.

I think the more likely reason is they want to be first at the table for the crumbs that creditors will get, make some money on fees and get first crack at all the financing the leaner, restructured and profitable airline that emerges will require. Hence making more money.

It's interesting how much professional money is/wants to get in on this. CIBC, GE, these German folks. Maybe they see that the operating environment going forward will be very favorable and want a piece. Or maybe your buddy Flapsforty is right. They just think it'll be liquidated and want to throw good money after bad.

[dagger]

You can spin this a couple of ways, but these banks plus LH enjoy excellent relations with AC, as does GE. All would have something to gain in a liquidation, all would have something to gain in a successful reorganization. LH, for example, wants to protect its revenue sharing with AC. It would not want another international carrier to shift "beyond" traffic to Asia, Africa and the Middle East to London or Paris connects. It might want to buy into ACTS (it's long been a rumored buyer) and into AC's new airport sub and AC's new Cargo sub. It might see itself taking over the catering contract. But these assets all have much more value in a continuing operation.

[Frosty]

This sounds very much like the post I put up below...something to make you go hmmmm.

Frosty