My finance view

MONTREAL–Air Canada (TSX: AC.B) is planning to seek about $600 million in financing, in part from government agencies, as part of a broad out-of-court restructuring of the airline, sources say.

Details are still being hammered out as the cash-strapped airline attempts to finalize new labour contracts with unions representing pilot and flight attendants.

While the government won't contribute directly, it would make credit available through government banking institutions, said Katherine Thompson, president of the Canadian Union of Public Employees, which represents 6,800 flight attendants.

"In this case it would be fully secure," she said during a break in marathon talks.

"We're not asking for any kind of handout. Neither is the company."

The government would become prime, secured creditors, with Air Canada assets pledged to back up the contribution.

The final amount in question was still being worked out. Combined with private funding, the total would be about $600 million, said another source.

Air Canada parent company ACE Aviation Holdings (TSX: ACE.B) is also expected to pony up some of its cash to help the airline.

Canada's largest carrier needs the money to help stay above the $800-million minimum cash balance required by one of its credit-card processors.

Analysts says failure to attract an infusion of cash could force the carrier to file for bankruptcy protection for the second time since 2003 loan until payday.

Meanwhile, Thompson said she believes the two sides are in final stages of discussion.

But her optimism that a deal was imminent waned slightly Monday as the two sides continued to disagree on the meaning of "cost neutrality."

"You can attach a cost to just about anything if you choose to do so," she said.

Finance Minister Jim Flaherty, who appointed a mediator to guide the discussions, personally met with the parties for about 40 minutes on Sunday.

The unions wanted Flaherty's assurance that he would protect key airline assets such as its slots at gateways around the world.

Air Canada and its pilots association declined to comment.

The airline recently reached tentative agreements with service agents, machinists and dispatchers. A 21-month moratorium on past service contributions was also agreed to by retirees.

Some analysts have estimated the move could save Air Canada about $570 million. The airline's pension deficit totals about $2.9 billion.

In exchange, the unions would get an equity stake in Air Canada, which some figure will be around 10 per cent.

Air Canada's shares closed up two cents to $1.49 in Monday trading on the Toronto Stock Exchange.

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If you owe your bank $1,000 you have a problem, but if you’ve borrowed $1 million it’s the bank that has the problem.

Going by that old maxim, then China, which has lent the United States upwards of $1.3 trillion, has a very big problem.

And it knows it. As a consequence, Beijing is diversifying its overseas investments and pressing U.S. officials for an “exit strategy” from the ultra-loose fiscal and monetary policies that China fears will eventually inflate away the value of its U.S. bond holdings and fell the dollar.

But China’s pragmatic policymakers also know there is no practical alternative to the dollar as the world’s main reserve currency.

Which is why bankers say any rhetoric from Tuesday’s inaugural BRICs summit in Russia about the need for the United States to cede power in global financial institutions should not be taken as a signal that Beijing is positioning the yuan to challenge the dollar’s supremacy.

The BRICs summit in the Urals city of Yekaterinburg will bring together the leaders of Brazil, Russia, India and China.

“We have seen the growing integration of the Chinese financial system into the global economy, and over time we will see a gradual enhancement of the role of renminbi,” Charles Dallara, managing director of the Institute of International Finance (IIF), told a meeting of his group in Beijing last week.

“Will it replace the dollar?” Dallara asked. “The fact is that I don’t think this is what Chinese officials want cheap car insurance.”

THE SDR FEINT

For sure, Zhou Xiaochuan, the governor of the People’s Bank of China, caused a stir with an essay in March arguing that the Special Drawing Right, the International Monetary Fund’s unit of account, might one day displace the dollar.

But diplomats and bankers who have recently visited the central bank say Zhou admits the proposal is unrealistic. They say his aim was to draw attention to concern expressed by Premier Wen Jiabao about the safety of China’s vast dollar holdings.

In particular, these people said, Zhou wanted to revive a debate over the so-called Triffin Dilemma.

Belgian-born economist Robert Triffin argued in 1960 that the United States could not supply enough dollars to satisfy the global appetite for reserves without triggering inflation, which in the long term would erode the dollar’s value.

“Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries’ demand for reserve currencies,” Zhou wrote. “The Triffin dilemma … still exists.”

Concretely, bankers said Beijing was acting on its concerns by urging the U.S. government to issue more Treasury Inflation Protected Securities. Unlike conventional bonds, TIPS shield their owners in the event of a rise in inflation. 

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Gasoline prices may be defying and prolonging the recession. But, if dollar-a-litre gasoline is keeping you close to home, at least it’s cheaper to take a bath.

The price of natural gas, which fires up water heaters, stoves and furnaces, has fallen much farther than analysts predicted before the North American economy stumbled and fell last winter.

Consumers who decided to sign a long-term supply contract are feeling burned, while those who took a chance on variable rates got lucky as prices fell.

Enbridge Gas Distribution and other regulated utilities, whose rates change every three months, now charge half as much as they did last summer and their prices could fall even lower.

Enbridge, which sells gas at its cost and makes its profit by pumping gas around, has applied to the Ontario Energy Board to cut its price further starting July 1.

Spokeswoman Lisa McCarney-Warus says she cannot prejudge what regulators will decide, but she did confirm Enbridge is proposing an overall reduction.

Enbridge now charges 23.54 cents a cubic metre, minus a temporary refund of earlier excess charges equal to 6.16 cents, for a net price 17.38 cents. That compares with 39 cents charged last summer, up from 26.7 cents earlier in the year. The average Ontario home uses about 3,064 cubic metres of gas a year, or $721.26, not counting delivery and other charges, at Enbridge’s current price (excluding the refund.)

Analysts got it right when they predicted in January of last year that gas prices were set to rise. What changed the outlook – at least temporarily – was the recession and the resulting plunge in manufacturing production.

The price of long-term gas contracts has also fallen, but not nearly as much as regulated prices.

Prices for a five-year contract in the Toronto area range from 31.4 cents a cubic metre from Canadian RiteRate Energy to 36 cash loans online.9 cents as of Oct. 31 from Universal Energy, according to Energyshop.com.

Tim Nerbas, president of Rite- Rate, points out that his price to supply gas 60 months from now is down dramatically, but is still nearly twice the price of gas for July.

That signals that gas markets do not expect the current price reprieve to last indefinitely.

Nerbas says consumers have to decide whether to grab a contract while prices are as good as four years ago, enjoy Enbridge’s much cheaper prices, or go for a compromise. He is offering a contract that is half a fixed price and half a floating rate price, that is projected to cost 26.7 cents starting in October.

Marketers of fixed-rate contracts have saved consumers money during most five-year periods in the past, but it’s an open question whether their customers will save as much or as often in the future.

No one can guarantee where prices are headed. That will depend on how long it takes the economy to recover and for bulging supplies of stored gas to be used up amid a two-thirds decline in drilling activity in Canada.

As Ontario utilities switch from coal to gas to generate electricity, this could increase demand.

But something new in the past year or two could help to stabilize prices across North America.

Greg Stringham, vice-president of the Canadian Association of Petroleum Producers, points out that new technology has fundamentally altered the economics of extracting vast supplies of natural gas from shale deposits in Texas, the Appalachian Mountains, St. Lawrence River valley and northeast British Columbia. The gas will not be cheap, but could make up for the decline of traditional supplies, including the hurricane-plagued Gulf of Mexico, he said yesterday.

jdaw@thestar.ca

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The Ontario Securities Commission has filed securities fraud charges against Weizhen Tang, a Toronto businessman who billed himself as "the Chinese Warren Buffett" and was accused of running a Ponzi scheme.

Yesterday, the province’s stock market watchdog laid a total of 12 charges against Tang and his companies, Oversea Chinese Fund Limited Partnership and Weizhen Tang & Associates.

Tang "will be defending the allegations. He will speak when his time comes during the court process," his lawyer, Calvin Barry, said yesterday.

A hearing is scheduled for June 24 in the Ontario Court of Justice.

The commission alleges that Tang collected more than $40 million from more than 100 investors, including residents of Ontario.

The charges include securities fraud, unregistered trading in securities, illegal distributions of securities and making prohibited undertakings with the intention of effecting trades in securities, which were alleged to have taken place between Jan. 1, 2006, and March 31, 2009. The province’s Securities Act states that no person or company can give written or oral representations on the future value or price of a security free credit report and score.

Each offence carries a maximum fine of $5 million, or a jail sentence of five years less a day, or both.

In March, the OSC slapped Tang and his companies with a court order to freeze assets, as well as a cease trade order.

The OSC said in its release yesterday that it has been working with the U.S. Securities and Exchange Commission in its investigation.

Tang is also facing similar charges by the U.S. Securities and Exchange Commission. The SEC alleges that Tang raised capital from U.S. investors by offering and selling limited partnership interests in WinWin Capital Limited Partnership, a Texas-based company he controls.

The OSC first raised allegations in March that Tang may have been operating a Ponzi scheme worth as much as $60 million (U.S.). Tang reportedly told investors that money from new investors was being used to pay out existing investors.

He also told OSC investigators that the fund lost $15 million in 2007, but he did not disclose the loss to investors.

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U.S. foreclosure activity for May ebbed from April’s record, but mortgages still failed at a staggering pace as President Barack Obama’s rescue programs had not had time to fully take root, RealtyTrac said on Thursday.

Foreclosure filings dipped 6 percent in the month but increased 18 percent from May 2008, marking the third highest month on record.

“There were almost one million foreclosure filings in a three-month period, and that’s simply unprecedented,” Rick Sharga, senior vice president at RealtyTrac in Irvine, California, said in an interview.

Temporary freezes on foreclosure activity ended in March. Failures of many seriously delinquent loans that were put on hold during those moratoria have been thrust back into the foreclosure cycle.

One in every 398 households with loans got a foreclosure filing in May. Filings, which include notices of default and auctions, were reported on 321,480 properties last month.

Stemming foreclosures is seen critical to bolstering home prices, consumer confidence and the recessionary U.S. economy.

Bank repossessions, known as real-estate owned or REOs, rose in May and should spike in coming months because the moratoria ended, RealtyTrac said.

OBAMA PLAN NEEDS TIME

The administration’s plans to ease loan modifications and refinancing were detailed in early March and haven’t been implemented long enough to derail foreclosures cash till payday advance.

The hurdles are high. Unemployment reached a nearly 26-year peak in May and mortgage rates have leaped a percentage point from their spring lows to more than 5-1/2 percent.

“One of the cures to this problem is enough buying activity to eat up the inventory of distressed properties,” Sharga said. “If mortgage rates go up to where people decide to wait out the market again, that’s just going to add to the inventory numbers and put more downward pricing pressure on all homes.”

RealtyTrac forecasts about 4 million foreclosure filings will be made this year on about 3.1 million households with loans. Last year, there was a record 3.1 million filings on about 2.4 million households.

In a more typical year, Sharga said there would be around 800,000 filings on 550,000 households.

“When you have a glut of inventory and downward pricing pressure that does tend to push properties into foreclosure,” said Sharga.

States where sales and prices soared most in the five-year housing boom earlier this decade remained the hardest hit. 

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NEW YORK - A bankruptcy judge says Chrysler can go ahead with its plan to terminate the franchises of 789 of its dealers.

U.S. Judge Arthur Gonzalez issued the order late Tuesday afternoon. It says the franchises can no longer act as authorized Chrysler, Dodge and Jeep dealers, effective immediately.

Chrysler LLC says it needs to cut its dealer ranks by about 25 percent as part of its plans to cut costs and quickly emerge from Chapter 11 protection health insurance quotes.

But the dealers insist that their existence doesn’t result in any substantial costs for the automaker.

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The Toronto stock market closed slightly lower in a volatile trading session yesterday that reflected investor concern about the timing of an economic recovery and how much further stocks can rally.

Toronto’s S&P/TSX composite index had tumbled almost 200 points in early trading but eventually clawing back most of those losses to end the day down 20.17 points to 10,549.12.

Early declines in commodity stocks moderated considerably while financials moved into the positive column.

The three-month-old rally has boosted the TSX by almost 40 per cent this spring as commodity stocks surged on high hopes for a global economic turnaround by late this year or early next.

Shares of oil and gas stocks have run up almost 80 per cent while the base metals sector has soared about 300 per cent.

The TSX energy sector was the leading decliner yesterday, down 1.2 per cent as the July crude contract in New York lost 35 cents (U.S.) to $68.09. Crude has doubled in price in the past four months in anticipation of higher demand, but hasn’t been able to build on Friday’s rise above the $70-a-barrel mark – a level not seen since October quick payday loan.

The TSX Venture Exchange fell 6.17 points to 1,131.82.

In currency markets, the Canadian dollar was ahead 0.17 of a cent (U.S.) to 89.54 cents after a rising greenback pushed the loonie down almost two cents on Friday.

New York markets also came back from a sharp loss amid concerns about the duration of the rally. Speculation that the U.S. Federal Reserve could raise interest rates sooner than thought has grown because U.S. Treasuries continue to weaken, forcing yields higher.

On Wall Street, the Dow Jones industrial average closed 1.36 points higher at 8,764.49 after losing as much as 130 points earlier in the session.

The Nasdaq composite index gave back 7.02 points to 1,842.4, while the S&P 500 index was off 0.95 of a point to 939.14.

The gold sector was ahead 0.7 per cent as the August bullion contract on the New York Mercantile Exchange fell $10.10 (U.S.) to $952.50 an ounce.

The Canadian Press

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Does "drinkability" have viability?

Anheuser-Busch has put the full weight of its marketing muscle behind a new campaign to convince drinkers that Bud Light is truly different from — hence, better than — Coors Light, Miller Lite and all the other competing light beers. Slapstick humor — often involving the lengths to which hapless guys would go for a Bud Light — would not be the main weapon this time.

Rather, the new branding for Bud Light would revolve around something specific: a balanced taste profile and refreshment, going down smooth and not filling you up. In a word, something A-B dubbed "drinkability."

The company hopes the "drinkability" message energizes its stalwart brand and sets it apart in the light beer segment. Bud Light is America’s bestselling beer — more than 40 million barrels sold annually. Bud Light triples the sales by the case of either Miller Lite or Coors Light.

But questions arose almost immediately after the campaign rolled out in force about eight months ago. Such as, is "drinkability" a word? (It’s been on the Budweiser bottle since 1962, but it doesn’t show up in Webster’s.) Would the commercials still be as funny? And most importantly, would the campaign work?

Anheuser-Busch executives say they like what they see in the "drinkability" effort, including improvements in Bud Light’s "brand health." To wit: Telephone surveys show that more consumers would consider drinking Bud Light, and fewer would reject it outright.

"We’re sticking with this campaign," said Keith Levy, vice president of marketing at Anheuser-Busch Inc., a subsidiary of Anheuser-Busch InBev, the world’s biggest brewer. "It is headed exactly where we wanted it to go."

But the brand’s sales are headed the other way. Bud Light sales as measured in cases are down 1.7 percent so far this year. The decline accelerated in recent days. Sales were down 4 percent in the four weeks ending May 19, according to trade publication Insights Express, which parsed data from Information Resources Inc.

The "drinkability" campaign, while unproven, is "not the real issue here," said Benj Steinman, editor and publisher of trade publication Beer Marketer’s Insights. Tight finances are causing people to trade down from Bud Light to cheaper beers such as Natural Light, Busch Light and Keystone Light. "The real thing is the economy," Steinman said.

So far, the "drinkability" campaign has attracted its share of skepticism. Critics have argued that every light beer, by definition, has "drinkability," or that all light beers taste roughly the same. Even A-B’s wholesalers — crucial middlemen between the brewer and the public — questioned the campaign’s relevance.

But Levy said beer drinkers’ buying patterns will tell the company when "drinkability" has run its course. "Discipline is good," he said. "That’s playing itself out, even under some criticism."

The best advertising gives people a logical reason and an emotional reason to buy a product, said Brian Till, who chairs St free business cards. Louis University’s marketing department.

"It’s great to be humorous, but you also have to deliver a compelling message about the brand," said Till, who said he likes Bud Light’s effort to differentiate itself.

In any case, Levy said, the Bud Light "megabrand" — including standard Bud Light and Bud Light Lime — is growing at a healthy clip. If you add the two beers together, their tracked sales are up 10 percent by case volume, and the megabrand has gained a full point of market share, Levy said.

Some drinkers are moving from Bud Light to Bud Light Lime. But because Bud Light Lime is higher-priced, the company can live with that dynamic, Levy said.

"We’ve got this great portfolio," he said, mentioning Stella Artois on the high end and Natural Light and Busch Light on the low end. "As consumers move around, we’ve got something for them."

As Anheuser-Busch executives watched Bud Light’s sales hold basically flat in 2008, they decided that the beer needed something more than comedy.

Anheuser-Busch, Levy said, needed to answer the question: "’Why is your light beer better than the others out there?’"

A-B’s research convinced the company that Bud Light fell in the middle of the taste spectrum of light beers: Not too heavy and lingering, but also not too light and watery, Levy said.

"Drinkability" was hatched. The new campaign — backed by Bud Light’s $192 million advertising budget, as estimated by TNS Media Intelligence — would purposefully ease off Bud Light’s trademark guffaws in favor of a more serious approach. The early commercials had the tone of a tutorial, with narrators confidently lecturing viewers on why light beers are not all the same.

"We knew early on in the past we had to explain drinkability," Levy said. "If you make the punch line too funny, you overwhelm the product message. Clearly it was not as funny and entertaining (at the beginning.) But clearly, there was a reason for that."

Anheuser-Busch realized that humor has its limits, said Ambar Rao, professor of marketing at Washington University.

"All these years, they’ve been talking about how you enjoy it, drinking it with your friends at fun occasions," said Rao. "But that doesn’t say much about why it’s fun. There’s no logical thread running through the ads."

The company says it is now trying to find the right balance between humor and product attributes. After a couple of fairly staid months, pratfalls are sneaking back into Bud Light commercials. In recent months, drinkability ads have featured skiers wiping out, office workers being tossed out of windows, bicyclists crashing and people bouncing off trampolines onto tables laden with food.

"Drinkability" or not, Bud Light hasn’t strayed too far from its roots.

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China agrees with the United States that the dollar will remain the world’s main reserve currency for a long time to come, U.S. Treasury Secretary Timothy Geithner said on Tuesday.

Chinese central bank governor Zhou Xiaochuan has floated the long-term possibility of replacing the dollar as the world’s main reserve currency with the Special Drawing Right, the International Monetary Fund’s unit of account.

But Geithner, wrapping up two days of high-level talks, said: "I believe the Chinese expect the dollar to be the principal reserve currency for a long period of time, as do we."

Geithner said Chinese officials had quizzed him on America’s economic outlook rather than the government’s ballooning budget deficit.

"They’re interested in where we are in recovery, both in the U payday loans.S. and China and around the world, and what we’re doing to carry forward reforms we committed to at the G20," he said.

Chinese officials have expressed concern that heavy deficit spending and an ultra-loose monetary policy could spark inflation, eroding the value of China’s U.S. bond holdings.

But Geithner said: "We have a strong, independent Fed and I am completely confident they have the ability to do their job under the law, which is to keep inflation stable and low over time, and that they will be able to — and certainly intend to — unwind these exceptional measures as soon as they have served their purpose." 

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Ontario’s $3.5 billion share of the rescue package for General Motors has helped push the provincial deficit to at least $18.5 billion, a record amount that is almost one-third higher than the McGuinty government’s projection made in March.

Provincial taxpayers now own 3.8 per cent of the iconic automaker, being dubbed Government Motors. The federal government gets another 7.9 per cent for a total Canadian stake in the firm of 11.7 per cent.

Prime Minister Stephen Harper confirmed yesterday Ottawa is kicking in $7.1 billion, meaning the two levels of government are providing $10.6 billion to help GM restructure as a smaller company designed to "break even" with production of just 10 million vehicles annually in North America.

Just as the bailouts of GM and Chrysler contributed to a stunning $50 billion deficit revealed last week by federal Finance Minister Jim Flaherty, the Ontario government now faces a deficit $4.4 billion higher than projected in March. Ontario’s previous record deficit was $12.4 billion in 1993.

Earlier yesterday, GM gained court protection from creditors in the U.S., but did not apply here. GM officials had predicted the action for weeks to allow the company some breathing room to resolve creditor disputes and reorganize.

The U.S. government is pumping another $30.1 million (U.S.) in loans into the company, in addition to $19.5 million that it committed earlier. American taxpayers will get 60 per cent of equity in the "New GM."

A United Auto Workers health-care trust will hold 17.5 per cent of the company’s shares while bondholders will get about 10 per cent.

Harper cautioned that Canadians should not expect much when the government sells its share on the stock market over the next few years.

"Clearly, taxpayers will get some money back when the day comes that we begin to sell our equity share, but to be frank we are not counting on that," he said, standing with McGuinty at a news conference at a downtown hotel yesterday.

The bankruptcy protection filing marked a low point for the auto icon, which ruled the world’s market for decades with brands such as Chevrolet, Pontiac and Oldsmobile.

But the company’s share of the market had been declining since the 1970s and it ran into a cash crunch last year because of the worldwide credit crisis that triggered the worst industry downturn in more than a quarter of a century.

The depth of Ontario’s financial commitment caught Queen’s Park off guard.

"Clearly, suffice to say, we did not plan enough contingency (funds) for the General Motors and Chrysler deals taken together," Finance Minister Dwight Duncan told reporters at Queen’s Park yesterday, noting that corporate tax revenues have also been lower than expected in the recession.

It was hard to nail down a number because the aid figure for GM was "bouncing around as late as" Sunday, Duncan added, refusing to say how many years it will now take to eliminate Ontario’s deficit. The plan had been to do so in seven years.

"I’m not dealing today with any outlying years payday loan… because, frankly, it’s far too early to say that," he said, conceding the deficit could end up being higher than $18.5 billion.

The massive aid has sparked a national controversy over whether taxpayers should spend money saving companies at a time when government could be tackling other economic and social problems.

Industry watcher Dennis DesRosiers has questioned the extent of aid and company concessions, and dubbed GM "Government Motors."

Harper and McGuinty have said that if their governments didn’t help, it would trigger thousands more job losses and push the economy into a deep recession.

"If you think this side’s dark, take a look at the other side," McGuinty said. "The choice our government is making is not an easy one but the right one."

But wary of growing public criticism over helping an automaker fix years of mismanagement, U.S. and Canadian leaders said their governments won’t be offering more aid.

"We cannot do this ever again," said Harper. "We’re going to do it right. … We’re not putting money into a company that we think will fail."

GM’s new restructuring plan contemplates the company will break even in an annual North American auto market of about 10 million vehicles, down from 16 million a few years ago. The company will close 11 more plants and idle three operations in the U.S., but reopen one of the latter factories with production of a small car. GM of Canada, which employs about 9,000, plans no more closings after significant downsizing during the last decade.

GM kept its plants open yesterday and hopes to emerge from bankruptcy proceedings as a smaller, leaner automaker within 90 days and conduct an initial public stock offering next year.

Although government leaders say they don’t want to hold GM stock for long, Canadian taxpayers could be shareholders until 2018 under terms of the restructuring plan.

The plan calls on the Canadian and Ontario governments to divest a minimum of 5 per cent of their holdings in the stock market annually with a minimum of 30 per cent after three years and 65 per cent after six years.

GM must pay half of the loans in seven years and the remainder in the eighth year at a minimum interest rate of 7 per cent.

Canada will get one seat on a new 13-member GM board in recognitions of its shareholdings.

McGuinty dodged questions about how much Ontario would contribute to reducing the huge shortfall in GM’s pension plans.

But federal Industry Minister Tony Clement said later that almost all, if not all, of Ontario’s aid would be used to tackle GM’s long- term pension woes including a big upfront payment.

"I think Mr. McGuinty and the Ontario government should be commended for taking the lead on that," Clement added in an interview. "It helped make this deal happen."

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