Canada is capping at C$1.2 billion (US$855 million) the fund it uses to loan money to international investors interested in buying regional aircraft. The "Canada Account" is the government's national interest account, funded by taxpayers, designed to facilitate the purchase of Canadian aerospace goods, primarily regional jets from Bombardier [Toronto: BBDa.TO].

The announcement came as Canada's export finance arm, Export Development Canada (EDC), is considering a request from Bombardier to help fund US Airways' [OTC BB: USALA.OB] planned C$3.3 billion (US$2.3 billion) purchase of the manufacturer's regional jets. The financing for that deal has not yet been finalized.

The capital in the Canada Account fund is capped at C$13 billion (US$9.3 billion), and the most recent figures available suggest that it has obligations of roughly C$11.4 billion (US$8.1 billion), Rod Giles, an EDC official, told CRAN. It would take an act of Parliament to increase the overall level of debt the government is willing to tolerate in the fund, he added. Money is generally loaned under the Canada Account when "the transaction is in the national interest," he said.

For example, in October 2001, the Canadian government financed Air Wisconsin's C$1.7 billion (US$1.2 billion) purchase of regional jets from Bombardier.

The C$1.2 billion remaining in the Canada Account has been earmarked for Canadian aerospace loans. Bombardier will be the largest benefactor because it is the largest aerospace company in the country. But the money only will cover sales already confirmed on Bombardier's order book and not future contracts, International Trade Minister Pierre Pettigrew said in announcing the decision.

The Canadian aerospace industry employs more than 78,800 people in 400 companies and had 2002 sales of more than C$21 billion (US$15 billion). The economic downturn in the North American airline industry has hurt the industry financially and has led to unprecedented cost-cutting measures. More airlines are restructuring their fleets to use lower- cost regional aircraft. This has increased demand for regional jets, but the state of the industry has made private financing for aircraft difficult.

"What is new in this policy decision by the federal government is that they are making money from the Canada Account available at market conditions," Bill Fox, a senior vice president at Bombardier, told CRAN. "It has the effect of expanding the availability [of financing], which is good news for the Canadian aerospace sector and good news for Bombardier."

Because the loans will be offered at market rates, "there's no question of a subsidy, and they are WTO consistent," Fox added, referring to rules established by the World Trade Organization to combat illegal export subsidies. Canada and Brazil, where Bombardier competitor Embraer [NYSE: ERJ] is headquartered, have engaged in battles before the WTO for more than six years. Each side has taken the other before the WTO to answer allegations of illegal export subsidies in the regional jet manufacturing industry. The government of Brazil is looking closely at the Canada Account, as is Embraer.

"We're certainly interested in this and we will follow it," Doug Oliver, Embraer's spokesman, told CRAN. "We only hope that they are WTO-compliant in the application of the loans."

In making the announcement about the Canada Account, Pettigrew said all the transactions will be structured on "commercial principles," and therefore will be WTO-compliant. The financing will follow "the terms of any understanding we negotiate with Brazil on financing for regional jets," he said.

Bombardier's Fox said: "I'm sure [Embraer and the Brazilians] will look at this with interest. But what they will see immediately is that these are loans that are being offered at market rates and therefore they are absolutely WTO-consistent, and therefore do not constitute a subsidy."

The last major Bombardier-related EDC initiative was in March, when EDC approved more than C$100 million (US$71 million) in new financing for the sale of rolling stock to Sistema de Transporte Colectivo-Metro in Mexico.

In February, EDC agreed to advance between C$50 million and C$100 million (US$36 million to US$71 million) to help Spain's Air Nostrum Lineas Aereas Del Mediterraneo take delivery of three 50-seat CRJ200s. At the end of January, EDC provided between C$25 million and C$50 million (US$17.8 million to US$36 million) to Croatia's Ministry of Finance for the sale of aircraft and spare parts.

Pettigrew said details on any specific financing through the Canada Account will be made public when transactions are finalized.

>>Contact: S�bastien Th�berge, Office of the Minister for International Trade, Canada, 613-992-7332; Gail Carle, Bombardier, 416-375-4121; Doug Oliver, Embraer, 954- 359-3414.<<