Canadian’s creditors must agree to American’s deal
A new flight plan
Canadian’s creditors must agree to American’s deal
Despite all the negotiating that they have done over the past year, Robert Crandall and Rhys Eyton exchanged relatively few words last week. Instead, the final terms of a conditional deal between American Airlines Ltd. of Fort Worth, Texas, and Canadian Airlines International Ltd. of Calgary fell to teams of lawyers—and their fax ma-
chines—rather than the companies’ respective chief executive officers. At the end of the day, American agreed to invest $246 million in financially troubled Canadian in exchange for 25 per cent of its voting stock, two seats on the eight-member board of directors and a 20-year computer reservation-services contract. Although American waived its previous demand to name the chief executive for Canadian, it did attach four significant conditions to its capital infusion. In addition to working with creditors to restructure its $2.5-billion corporate debt, Canadian will have to extricate itself from a contract with its current computer-reservation service. Airline employees must also accept an average wage reduction of 10 per cent, while regulators in Ottawa decide whether a foreign alliance serves the best interests of domestic consumers.
Of all the conditions that Canadian has agreed to meet by Dec. 31,1993, the toughest one, according to experts, will be the coordination of its creditors. Although Canadian
spokesman Linda Thomas said that their initial response to the airline’s complex financial restructuring plan has been “favorable and encouraging,” there is still considerable ground to cover in further meetings planned for January and February. As a result, the company is counting on the vote of confidence from American to help win creditor support for a proposal
that, among other things, calls for the suspension of all debt repayment until late 1993, as well as the conversion of $900 million of debt into equity.
Veteran Toronto insolvency lawyer Frank Bennett of Bennett, Winch and Gasee, who worked on behalf of the Reichmann family to restructure Olympia & York Developments Ltd. (O&Y), says that creditors generally are still in “full denial” and are reluctant to accept the deflated value of their corporate loans in the current economic climate. As well, he added, creditors tend to pursue their own agendas exclusively and are frequently reluctant to work together for a common goal. “It takes time for the shock and anger to dissipate in every bankruptcy,” said Bennett. “Time is always lost during that process.”
Analysts say that the dramatic collapse of O&Y in 1992 has had a positive effect in educating creditors overall, but the dispute over the developer’s assets has also created serious rifts in the financial community. Said one Van-
couver-based investment banker, who spoke on condition of anonymity: “The banks are still yelping and pointing fingers at each other over the collapse of O&Y. It is going to be a delicate job to overcome all that mistrust and get them together.” Another obstacle to team spirit among international creditors is that they have different reporting requirements, as well as their own shareholders to appease.
Canadian is especially vulnerable to such potential creditor disputes because it has elected to restructure without the benefit of court protection under the federal Companies’ Creditors Arrangement Act (CCAA). AS a result, a secured creditor who is dissatisfied with the company’s restructuring initiative could singlehandedly push it into bankruptcy by seizing assets. According to Thomas, Canadian avoided CCAA protection in order to gain a greater degree of flexibility for both companies, and airline management “wanted to work with creditors to build a consensus.”
Although Canadian’s executives will closely monitor the mood of secured and unsecured creditors during the next several months, they also have to deal with American’s other conditions in ways that inspire creditor confidence. Early this month, Canadian employees in six unions are expected to endorse a 10-per-cent wage cut and a three-year wage g freeze—despite the fact that j±j 1,300 jobs will be lost if the I American investment is final| ized. Canadian’s manageI ment has already volunteered I to accept a 20-per-cent salary * reduction. According to Bennett, that corporate solidarity could be critical in eliciting goodwill from creditors by showing them that they are not the only ones making concessions.
For similar reasons, Canadian filed an application last week for approval of the agreement with the National Transport Agency in Ottawa, which has 120 days to rule on it. Meanwhile, in early February, the Competition Tribunal is expected to start a hearing into Canadian’s controversial attempt to withdraw from its computer-reservation contract with Gemini Group Automated Distribution Systems Inc. Canadian is arguing that it will save money by switching from Gemini to American’s Sabre network. And despite the fact that Canadian is already operating on a combined federal-provincial bailout of $120 million, it is expected to have less than $35 million in cash left by January. While creditors and regulators consider their response to the proposed deal, Canadian’s struggle to survive has become a race against time.
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