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Chorus Aviation Inc. (Chorus) has announced that it will establish a new regional aircraft leasing subsidiary, Chorus Aviation Capital, and has entered into an agreement pursuant to which Fairfax Financial Holdings Limited and certain of its subsidiaries (collectively, Fairfax) will invest $200 million in Chorus through a private placement (the Fairfax Investment) of 200,000 convertible debt units (the Convertible Units).
“Today’s [Dec. 19] announcement marks a significant milestone in support of our vision to deliver regional aviation to the world,” said Joe Randell, president and chief executive officer, Chorus. “We have been building our capabilities in aircraft leasing, and are encouraged both by our successes to date and the opportunities we see in this segment. The cost-effective and flexible source of capital provided by Fairfax will enable us to accelerate and strengthen our position as a leading player in this growing business segment.
“With this support from Fairfax, we will leverage our extensive relationships, knowledge and experience in aviation to create a regional aircraft leasing company capable of delivering a full suite of support services to customers worldwide.”
“Chorus has been the leading Canadian regional carrier for decades, and has a long track record of profitability and strong operational performance,” said Prem Watsa, chairman and chief executive officer, Fairfax. “We believe the Chorus management team is pursuing an entrepreneurial strategy built around their regional aircraft expertise that capitalizes on strong market opportunities with attractive returns.”
Chorus’ diversification and growth strategy
In recent years, Chorus has steadily grown its aircraft leasing revenues from aircraft deployed under the capacity purchase agreement between Jazz Aviation LP and Air Canada (the CPA), reaching $71.9 million in the first nine months ended Sept. 30, 2016. On Nov. 9, 2016, Chorus announced a transaction involving the lease of up to four Bombardier CRJ1000 aircraft to Air Nostrum, Lineas Aereas Del Mediterraneo, S.A., marking the first significant aircraft leasing transaction outside of the CPA.
The establishment of an aircraft leasing subsidiary supported by Fairfax’s $200 million investment in Chorus provides Chorus with a solid foundation from which to realize its ambition of building a globally-competitive, regional aircraft leasing business capable of providing a full suite of services to regional aircraft operators.
Chorus Aviation Capital will be led by Steven Ridolfi as president. Ridolfi is currently the senior vice-president of strategic investments, mergers and acquisitions at Chorus. His long and distinguished career in aerospace, including his experience leading both Bombardier’s Regional Aircraft and Business Aircraft units, makes him ideally suited to lead this new organization.
The Fairfax investment
The Fairfax investment consists of 200,000 convertible units at a price of $1,000 per convertible unit for gross proceeds of approximately $200 million. Each convertible unit comprises a $1,000 secured debenture (the debenture) and 121.2121 warrants (the Warrants).
The debentures will bear interest at a rate of 6.00 per cent per annum, are secured by certain Dash 8-100 and Dash 8-300 aircraft and real estate property owned by the Corporation’s subsidiaries (the Collateral Security), mature on Dec. 31, 2024, (the maturity date) and will be redeemable by the corporation at par at any time after Dec. 31, 2021, except in the event of the satisfaction of certain conditions after a change of control or exercise of the warrants.
The collateral security will be released in the event that Fairfax sells or otherwise disposes of any of the convertible units.
Each warrant will be exercisable by the holder thereof to acquire one Share1 at an exercise price equal to $8.25 per Share payable in cash or by tendering the debentures. Except in certain circumstances relating to a change of control of the corporation, the warrants may only be exercised after Dec. 31, 2019, up to and including the earlier of the redemption of the debentures by the corporation and the business day immediately preceding the maturity date. The warrants will include customary anti-dilution provisions.
Assuming the exercise of all of the warrants, Fairfax, through its subsidiaries, would beneficially own 24,242,424 of the issued and outstanding shares of Chorus, representing approximately 16.5 per cent of all issued and outstanding shares after the exercise of all of the warrants (assuming no other issuances of shares by Chorus or any adjustments to the shares issuable upon the exercise of the warrants pursuant to the applicable anti-dilution provisions).
In order to reduce interest costs, Chorus will have the ability (subject to meeting conditions precedent to each convertible unit issuance) to issue convertible units in up to four tranches between Jan. 1, 2017, and March 31, 2017. All of the warrants will be issued to Fairfax upon the issuance of the initial tranche, however, any warrants relating to debentures that are not ultimately issued will not be exercisable by the holder thereof.
Fairfax has agreed to hold the convertible units until at least Dec. 31, 2019, after which time it may dispose of all or part of the convertible units.
Chorus will use the proceeds of the Fairfax Investment primarily to fund the growth of the corporation’s regional aircraft leasing business, as well as for working capital requirements and general corporate purposes.
The Fairfax investment is conditional upon, among other things, receipt of conditional listing approval by the Toronto Stock Exchange of the debentures as well as the Class B voting shares and Class A variable voting shares of Chorus issuable as applicable upon the valid exercise of the warrants.
RBC Capital Markets and UBS Securities Canada Inc. are acting as lead agents for Chorus.
