Air Canada's stock recovered most of its early losses Tuesday, after some analysts cut their price targets in response to a $500 million discounted government stake in the airline as part of a financial aid package.
After months of negotiating, the federal government and Air Canada announced a deal on Monday that allows the airline to access $5.4 billion in loans while Ottawa takes a $500 million stake in shares at $23.1793, a 14 per cent discount compared to Air Canada's closing price on Monday. The deal also provides the government with 14.6 million warrants at $27.2698 over 10-years, with 50 per cent vesting immediately.
Air Canada's stock (AC.TO) fell as much as 6.7 per cent on Tuesday but ended the trading session flat. It closed the day down 12 cents at $26.88 per share, a decrease of less than one per cent compared to Monday's close.
Financial analysts at Scotiabank, TD and National Bank Financial each lowered their price targets for Air Canada's stock on Tuesday, citing the equity dilution.
If all warrants are exercised, the government's stake in Air Canada would represent approximately 10 per cent of voting shares, according to a release from the Canada Enterprise Emergency Funding Corporation (CEEFC).
"While the package provides Air Canada with a significant rain check for future liquidity needs, including low-cost loans, and support to the Canadian aviation industry, we believe some investors could be negatively surprised by equity dilution (up to 10 per cent) and a repayable loan for refunds," Scotiabank analyst Konark Gupta wrote in a note to clients Tuesday, lowering the price target for the company from $31 to $29.
TD Securities analyst Tim James wrote in a note to clients that access to capital "will prove to be insurance as opposed to necessary liquidity to finance operations or capital expenditures in 2021 and beyond." He also cut the price target for the airline from $31 to $29.
"Our target price declines due to the negative impact of greater short-term cash-burn and the impact of the dilution from the share and warrant issue on the price to equity component of our target," James wrote.
National Bank Financial analyst Cameron Doerksen also lowered his price target from $31 to $29, citing the equity dilution.
Still, analysts say the agreement removes liquidity risk for the company as it continues to navigate the COVID-19 crisis and dramatically reduced demand for travel.
"Overall, we view the announcement as positive," RBC Capital Markets analyst Walter Spracklin wrote in a note to clients.
"We see the proposed funding from the government alleviating liquidity concerns and providing an important backstop that should allow Air Canada to place a greater deal of focus on navigating the operational challenges associated with eventual recovery from the pandemic."
In addition to the equity stake, the deal includes $4 billion in repayable loans at rates starting at 1.5 per cent, as well as a $1.4 billion loan with an annual interest rate of 1.211 per cent specifically aimed at supporting customer refunds for non-refundable tickets.
As part of the deal, Air Canada has agreed to provide refunds starting April 13 for passengers who purchased non-refundable tickets but did not travel due to COVID-19 since February 2020.
Starting Tuesday, eligible customers who purchased flights on or after Feb. 1, 2020 will be able to obtain a refund by submitting a request online or with their travel agent. The policy covers tickets and Air Canada vacation packages purchased before Tuesday that were cancelled either by the airline or by the customer for any reason.
The $1.4 billion loan provided by the government for refunds will cover all cancellations – made by passengers or by the airline – prior to March 22, 2020. The funding will also cover all cancellations made by the airline after March 22, 2020. Air Canada will provide its own financing for all cancellations for additional refunds, including those made by passengers after March 22, 2020.
Air Canada also announced that, going forward, if a flight is cancelled or rescheduled by more than three hours, customers will be offered the choice of a full refund, Air Canada Travel Voucher, or the equivalent of value in Aeroplan points with a 65 per cent bonus.
The airline will also resume regional routes that it suspended since the pandemic began and will have to restrict dividends, share buybacks and executive compensation. Senior executive total compensation at the airline will be capped at $1 million each for as long as Air Canada is using the loan facilities. The company will also be required to complete its order of 33 Airbus A220 aircraft and 40 Boeing 737 Max aircraft.
With files from Reuters
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.