GE Capital Aviation Services warned Tuesday that it may drop plans to lend Air Canada $1.8-billion if key conditions of another financing led by Deutsche Bank cannot be met by May 15, even as the insolvent airline won court approval to start looking for $250-million in new equity.
“If the DB deal is not approved, then the GE financing should not be assumed,” Robert Thornton, a lawyer acting for GECAS, said Tuesday of Deutsche Bank's agreement last week to back-stop an $850-million equity rights offering to Air Canada's creditors, $400-million more than it agreed to underwrite in an earlier version of the deal. “No one should be surprised if the GE support evaporates.”
In fact, Mr. Thornton told an Ontario Superior Court hearing in Toronto that the Deutsche Bank deal “is Air Canada's last and best hope for exiting this restructuring.”
Air Canada has been under the protection of the Companies' Creditors Arrangement Act (CCAA) since April 1, 2003.
It was seeking approval from Mr. Justice James Farley Tuesday for the Deutsche Bank deal, as well as for the new “equity solicitation process” it will use to secure an investor willing to pump in $250-million and for an expanded role in the restructuring for its court-appointed monitor under the CCAA, Murray McDonald of Ernst & Young Inc.
The expanded Deutsche Bank agreement and the plan to seek $250-million in additional equity followed Hong Kong billionaire Victor Li's decision last month not to invest $650-million in the airline. GECAS is a unit of General Electric Capital Corp. of Stamford, Conn.
Only last week it agreed to a five-month extension of its financing agreement with Air Canada, but linked it closely to the Deutsche Bank deal. One condition it set was that the court approve the agreement with the German bank by this Friday.
At the close of the hearing Tuesday, Judge Farley ruled that Air Canada could “start today as is” with the new equity solicitation process, and not only approved a broader role for Mr. McDonald, but urged the unions, the company and its creditors to cede him more responsibility.
However, he reserved his decision on the Deutsche Bank deal, as lawyers for several Air Canada unions, while voicing support for the transaction over all, raised concerns about several of its key conditions, which must be met by May 15. They also asked Judge Farley to delay dealing with the Deutsche Bank agreement for two days to give them more chance to study it, but he refused.
Among those conditions are that the unions agree both to make concessions that will cut $200-million more from the airline's labour costs and also to “compromise or waive” all grievances against the company and other issues. The airline is also required by that date to have reached “satisfactory arrangements” with the federal pensions regulator on plans to fund over 10 years, twice the current legal maximum period allowed, a $1.2-billion deficiency in its employee pension plans.
Canadian Auto Workers union lawyer Sean Dewart told the hearing Tuesday that the union supports the Deutsche Bank deal, but that it thinks the court should not approve the transaction until after it becomes clear whether these conditions can be met. “Before we give Deutsche Bank the keys, we [must] make them come to terms with labour,” he said.
Air Canada has said the unions are $200-million short of the $1.1-billion in cost reductions that were agreed to last year, and in meetings over the past week has told them individually how much of the shortfall it is expecting them to make up.
However, the unions are demanding hard evidence from the company that they have not met their targets. The risk otherwise, Mr. Dewart told the court, is this will turn out as “just a transparent grab” based on “greed not need.”
Air Canada has told the CAW, for instance, that it is $50-million shy of the $160-million in savings to which it committed last year. Mr. Dewart said this would work out to an average of $11,000 a head for CAW members at the airline.
On another front, Hugh O'Reilly, a lawyer for the International Association of Machinists and Aerospace workers, argued that Deutsche Bank's demand for a “clean slate” from the unions in terms of grievances is a “non-starter,” in terms of labour law. The unions need far more information from Deutsche Bank before they can act.
“We need to talk to them about what it is they mean, whether they're material grievances or not,” Mr. O'Reilly said following the hearing.
By contrast, Kenneth Rosenberg, a lawyer for the Air Line Pilots Association, which represents about 1,400 pilots at Air Canada's regional airline unit Jazz, said his clients support approving the Deutsche Bank deal, even though they would have preferred to see the concessions it requires dealt with in advance. “At ALPA, we believe this is a good news story,” Mr. Rosenberg told the court.
Howard Gorman, a lawyer for the Air Canada Unsecured Creditors Committee, spoke against the unions' request for a two-day adjournment, saying that even “another lost two days is going to put the company in further unnecessary peril.”
Mr. Gorman also questioned whether the $200-million in additional cost savings Air Canada is seeking from the unions is enough to make the airline competitive with its domestic rivals. “I don't think it does,” he said.
Meanwhile, asked by Judge Farley whether his client is “serious” about Air Canada or “just kicking the tires,” Deutsche Bank lawyer Matthew Gottlieb said: “It is very serious about this transaction and its roles.”
As for complaints raised by union lawyers at the hearing about the tightness of the May 15 deadline for meeting the cost savings and other conditions, Mr. Gottlieb denied the German bank is trying to “jam” any party. “But what Deutsche Bank needs is quick closure as to whether the deal can be done.”
As for the $200-million, he described it as “a rounded number of concessions that are going to be required” because in Deutsche Bank's view, the current cost structure “is not going to work.”
