Air Canada is Canada's largest airline and the largest provider of scheduled passenger services in the Canadian market, the Canada-U.S. transborder market and in the international market to and from Canada. In 2018, Air Canada, together with its Air Canada Express regional partners, carried over 52 million passengers, offering direct passenger service to more than 210 destinations on six continents. Air Canada is a founding member of Star Alliance™, providing the world's most comprehensive air transportation network.

Air Canada's predecessor, Trans-Canada Air Lines (TCA) inaugurated its first flight on September 1, 1937. The 50-minute flight aboard a Lockheed L-10A carried two passengers and mail between Vancouver and Seattle. By 1964, TCA had grown to become Canada's national airline; it changed its name to Air Canada. The airline became fully privatized in 1989. Air Canada shares are traded on the Toronto Stock Exchange (TSX:AC), and effective July 29, 2016, its Class A variable voting shares and Class B voting shares began trading on OTCQX International Premier in the US under the single ticker symbol “ACDVF”. Air Canada is among the 20 largest airlines in the world and employs 30,000 people. Its corporate headquarters are located in Montreal.

In total, the airline operates 391 aircraft across all three airline subsidiaries (Air Canada, Air Canada Rouge and Air Canada Express). While Air Canada’s fleet is old by modern airline standards, the fleet renewal program means that they will take delivery of the first of 45 Airbus A220-300 (formerly the Bombardier C Series) aircraft to our fleet as we move forward with the renewal and modernization of our narrow-body fleet. We will take delivery of another 18 Boeing 737 MAX aircraft, which joined our fleet in 2017 after a firm order of 61. This builds on the airline’s recent international fleet renewal of state-of-the-art and fuel-efficient Boeing 787 Dreamliners. Air Canada plans to operate 37 Boeing 787 Dreamliners by the end of 2019, including 29 larger Boeing 787-9 versions, with all 37 scheduled to be delivered by the end of 2019.

Along with its fleet renewal, Air Canada plans to refinance some of its debt, as well as to restructure the debt of its maintenance subsidiary. Specifically, the plan is to refinance the USD debt that has a current interest rate of 7.65% and to refinance $30 million at its maintenance subsidiary debt. Currently, Air Canada’s relevant debt (modified) consist of the following:

Outstanding Debt Securities Air Canada &Subsidiaries    Issue Name	Issue Date	Maturity Date	Currency	Origianl Issue Amount(millions)	Amount Oustanding	Annual Coupon	Market Price	Other
ACX 7.625 10/01/2023 CAD 500	10/1/2013	10/2/2023	CAD	500	300	7.625	125.72	Callable at 012
ACX 7.625 10/01/2023 USD 500	10/1/2013	10/2/2023	USD	500	350	7.625	122.50	No call feature
ACX 4.75 10/06/2024 CAD 200	10/16/2016	10/6/2024	CAD	200	200	4.75	115.05	No call feature
ACX 5.0 06/15/2025 USD 200	12/14/2015	6/15/2025	USD	200	121	5.00	119.10	Callable at 101
ACX 3.3 07/15/2031 USD 700	12/21/2017	7/15/2031	USD	700	700	3.30	108.00	Callable at 105 and convertible

Question:
Air Canada wants to refinance debt ACX 7.625 10/01/2023 USD 500 and replace it with debt similar to the ACX 3.3 07/15/2031 USD 700 debt. For the purpose of this assignment, assume that the current date is December 31, 2017 unless otherwise specified.

a. What factors might allow Air Canada to raise new debt at less than half the interest rate of the debt issued in 2013?
b. Compute the amount at which the existing bond holders might be willing to surrender their existing bonds. Note that the current bondholders can sell their bonds in the market at 122.50% of the bond’s face value and they have very little reason to do so or surrender the bond to Air Canada given that the replacement bond has a coupon rate of about 3.3 to 5 percent. Start by computing the theoretical value of the old bond and adjust it in various ways so that existing bond holders might be enticed to sell the bond to Air Canada. What sweeteners might you have to offer? Please make sure you adequately motive your selection of the market rate in your calculations. Assume the new debt has a 10-year duration.
c. Assume that Air Canada was able to complete the retirement and reissuance of the old and new bond, calculate the relevant cash flows. Specify the cost savings gained by the retirement and reissuance.
d. Make the entry to retire the old bond issue and the issuance of the new bond. Assume no accrued interest.
e. What benefits other than what you have mentioned in a through d night accrue to Air Canada? Hint: there are several non-quantitative benefits for example.