Financing an air charter operator acquisition

Ask a lender what it will weigh: the cash flow, the buyer and the assets that would secure the loan. Section 58 of the Canada Transportation Act says a licence for the operation of an air service is not transferable. A buyer has to plan funding around that fact. This guide covers what to ask a lender about security, what government-backed programs do and do not say, and how a seller’s loan fits in.

What a lender can take as security

Ask each lender which assets it would take and how it would take them. Ask about the aircraft in particular, and how their condition, maintenance records and the way each is held affect what the lender will lend against them. Because the licence stays with the company, a lender that takes security in a share sale is relying on a company whose right to operate depends on continued compliance. Section 63 requires the Agency to suspend or cancel a domestic licence where it determines that the licensee ceases to be a Canadian or to hold the aviation document or insurance, and allows it to do so where the licensee has contravened, or does not meet the requirements of, other provisions of Part II or a regulation or order made under it. Ask what the lender would do if that happened, and whether its loan documents say so.

Questions a lender may raise

Several features are worth raising with a lender directly, rather than assuming how it will view them. Revenue may rest on a small number of clients or on the owner’s own flying. Ask which pilot credentials belong to the pilots rather than the company. The ownership requirement can limit who may take control if a lender enforces. Ask whether the lender has financed an air operator before and what conditions it will attach, such as insurance, maintenance reporting or limits on a change of control.

Government-backed programs: read the guidelines

The Canada Small Business Financing Program publishes guidelines that set out the classes of assets a term loan can finance, including equipment, and, since July 2022, intangible assets and working capital costs. The guidelines say goodwill counts as an intangible asset if part of a going concern purchase. They also say lenders should refer to the Act and Regulations as the final legal authority. The guidelines do not name aircraft, so ask the lender whether a given aircraft qualifies. See does the CSBFP cover buying a business for the basics.

BDC and combined funding

BDC states that a financing structure for a business purchase may combine the buyer’s own investment, a business loan and seller financing, and that the buyer and seller must agree on a purchase price before the buyer applies for financing. Ask BDC and any other lender what documents it needs and whether the regulatory steps in your deal must be resolved before it commits.

Questions about a seller’s note

A vendor take-back note is a loan from the seller to the buyer for part of the price; the glossary entry on vendor take-back explains the term. Ask your lender whether it permits a seller’s note and whether the note must rank behind the lender’s security. Ask the seller what happens if the buyer stops paying, and whether the note is secured on aircraft. Ask your lawyer how a default under the note would interact with the lender’s own default terms.

Build the regulatory steps into the funding timeline

If your transaction is notifiable under the Competition Act and involves an air transportation undertaking, sections 53.1 and 53.2 of the Canada Transportation Act add a notice to the Minister and the Agency and a requirement for approval before completion, subject to the Minister’s notice under subsection 53.1(4) that no public-interest issues arise. Ask each lender how long its commitment stays open and whether it will extend that period if a review runs longer than planned. Ask also whether it will fund against conditions, such as the Agency’s determination, rather than waiting for all of them to be met. Settle these points in the commitment letter, not afterwards, and ask your lawyer to review the lender’s conditions before you accept them.

• Which assets the lender will take as security, and how it treats a licence it cannot take.
• Whether a government-backed program accepts the aircraft, and which class of asset applies.
• What the lender requires before committing, including regulatory approvals.
• Whether a seller’s note is allowed, how it ranks and whether it is secured.
• What happens under the loan if the licence is suspended or the ownership test fails.