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The black joke on Bay Street this week is that Calin Rovinescu is working for Genuity Capital Markets again.

That stab at humour reflects the fact that a handful of investment dealers, led by Genuity and TD Securities, are accidental owners of Air Canada, after an ambitious $260-million share sale this week failed to sell quickly. Talk on the Street is the dealers still own somewhere between a third and half of this equity.

The line about Mr. Rovinescu, Air Canada's chief executive officer, reflects the fact that he joined the airline in April after a successful stint as an investment banker and partner in Genuity, an employee-owned investment dealer.

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The Air Canada bought deal is shaping up as one of those transaction that forces the Street to work for its fees. And those with long memories are shaking their heads over the fact that once again, an underwriting for Canada's biggest airline is translating into grief for the investment dealers.

This transaction saw the investment banks agree to sell units in Air Canada for $1.62 each, with each unit consisting of one class B voting share and half a warrant to buy an additional share at a price of $2.20 over the next 36 months. National Bank Financial, GMP Securities, Raymond James and Salman Partners are also in this underwriting.

This was a bold deal, one meant to dramatically increase Air Canada's public float. Much of the airline's equity is still held by ACE Aviation, but the holding company will be diluted to a 24 per cent stake from its current 75 per cent with this financing. Along with strengthening Air Canada's balance sheet, this week's bought deal is meant to give institutions a way to build a meaningful stake in the airline, and that wasn't possible with a tiny public float.

Air Canada, and the underwriters, also hope to capitalize on the sentiment that propelled a well-received $172-million share sale from WestJet Airlines last month, along with a slew of successful financings from U.S. airlines. United parent UAL Corp. sold $424-million of shares and convertible debentures on Oct. 1, and AMR Corp., parent to American Airlines, raised $460-million (U.S.) with a convertible debenture offering in late September.

Investors are buying airline stocks as recovery plays, in anticipation of an economic rebound that boosts ticket sales. For the domestic carriers, there's a also currency play in airline stocks, as a rising Canadian dollar lowers the cost of fuel, and Air Canada's debt servicing costs will fall, as the airline has U.S. dollar-denominated loans.

The dealers working with Air Canada, and the airline's executives, are now hard at work selling this story, with investor road shows and one-on-one meetings with institutions planned for coming weeks. This underwriting does not close until Oct. 27.

There have been bought deals that translate into real pain for the underwriters involved. This Air Canada deal may feature a hard landing, but it likely won't translate into crash.

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Here's how the numbers work: The class B shares are changing hands at $1.51 on Friday on the Toronto Stock Exchange - the stock dropped 18 per cent on news of the financing. Traders say the new Air Canada warrants will likely trade for something in the 15 cent to 20 cent range when they are listed on the TSX.

Add the value of the warrant to where Air Canada class B shares are now trading, and the new units are not trading at a material discount, which means the dealers don't face a major loss.

The Street did take a hit on this airline back in 1995, when Air Canada launched a $500-million bought deal. The market experienced serious turbulence after the underwriting was announced, and the 15 dealers involved lost an estimated $12-million on the trade.

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About the Author
Business Columnist

Andrew Willis is a business columnist for the Report on Business at The Globe and Mail, based in Toronto.He has been in business communications and journalism for three decades. More

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