201ACC: Air Canada Debt Restructuring Analysis and Solutions

This assignment analyzes Air Canada's debt restructuring, focusing on the factors influencing the issuance of new debt at lower interest rates. It includes a detailed calculation of bond valuation, determining the amount existing shareholders might surrender their shares, considering coupon rates and market interest rates. The assignment also examines the cash flow implications of retiring and reissuing bonds, along with the associated journal entries. Finally, it explores the non-quantitative benefits of issuing new bonds, such as maintaining ownership structure and potential advantages related to interest rate drops and callable bonds. The solution provides a comprehensive overview of financial concepts related to debt management and corporate finance, including relevant calculations and analysis.

Running head: 201ACC - DEBT RESTRUCTURING
201ACC - DEBT RESTRUCTURING
Name of the Student
Name of the University
Author Note:

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201ACC - DEBT RESTRUCTURING
Table of Contents
Question A.................................................................................................................................2
Question B..................................................................................................................................2
Question C..................................................................................................................................3
Question D.................................................................................................................................3
Question E..................................................................................................................................4
Reference....................................................................................................................................5

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201ACC - DEBT RESTRUCTURING
Question A
The factors that might allow Air Canada to raise new debt at an interest rate less than half
the interest rate on the debt issued in 2013 are:
 Improved Credit rating of the company
 Decrease in the market interest rate.
Question B
Solution:
The amount at which the existing shareholder will be willing to surrender its share is
the present value of the share (Ehrhardt and Brigham 2016). The current value of the semi-
annual ACX 7.625 USD 500 bond is:
Annual coupon rate = 7.625%
Semi-annual coupon rate = 7.625%/2 = 3.8125%
Interest rate will be half as well = 7.65%/2 = 3.825%
Time = 31-Dec-2019 to 31-Dec-2023
Tim will be double = 4 x 2 = 8 years
Current value of the bond = [{3.8125/(1+3.825%)}+{3.8125/(1+3.825%)2}+
{3.8125/(1+3.825%)3}+ {3.8125/(1+3.825%)4}+ {3.8125/(1+3.825%)5}+
{3.8125/(1+3.825%)6} + {3.8125/(1+3.825%)7}+ {103.8125/(1+3.825%)8} = 99.91
Considering the general scenarios, the flat price of the bond has been used as 100.

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201ACC - DEBT RESTRUCTURING
The amount at which the existing bond holders might be willing to surrender their existing
bonds 120.5%*500 Million=602.5 Million.
Current price of the bond ACX 7.625 2023 USD 500 =99.91*500 million/100=499.55
million
Current price of the bond ACX 3.3 2031 USD 700 Debt =79.43*700 million/100=556.01
million
Now with this bond the bond holders will not surrender their bonds because as per market
price it is 602.5 million
Best sweeteners will be to call the bond @130% but this will cause a loss to the company.
In order to get this surrender, the coupon rate should be more than 7.65% of the interest rate
or second option is Air Canada can pay 602.5-556.01=46.49 Million.
Question C
Assuming that Air Canada is able to complete the retirement and reissuance of the old
and new bond, then Air Canada will see an outflow in the cash of $499.55 million as the
company will have to pay less amount for redemption and reissuance as compared to the
market price. The inflow of the cash will be $700 million.
The company will effectively save cost from the new issue by $(700-556.1) = $143.9
Question D
Journal Entry
ACX 7.625 USD 500 bonds $499.55
Cash $499.55

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201ACC - DEBT RESTRUCTURING
Cash $700million
ACX 7.625 USD 500 bonds $700 million
Question E
Issuance of bonds will provide several non-quantitative benefits to Air Canada. The
benefits are as follows (McNeil, Frey and Embrechts 2015):
 With the issuance of new bond, ownership of the company will remain unaffected as
in case of stock issuance.
 It does not affect earnings per share of the company, which is a metric used by the
investors to evaluate the health of the company.
 Company can take advantage of the possible drop in the interest rate in callable bonds
 Company can redeem callable bonds prior to the maturity date according to the
schedule of callable dates.

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201ACC - DEBT RESTRUCTURING
Reference
Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage
learning.
McNeil, A.J., Frey, R. and Embrechts, P., 2015. Quantitative risk management: concepts,
techniques and tools-revised edition. Princeton university press.