Aimia Inc. bondholders are betting the loyalty-program company can ride out the short-term turbulence caused by the loss of its key partner. Shareholders aren’t so sure.

The Montreal-based company’s C$250 million ($197 million) of May 2019 bonds have bounced back from their initial drop after Air Canada, the country’s largest airline, said in May that it will withdraw from Aimia’s Aeroplan loyalty program and start its own rewards plan in 2020. As the company gets ready to report earnings, Aimia shares remain down 83 percent since the announcement.

“Initially it was a shock and there is always an overreaction to any kind of shock,” Neil Linsdell, an analyst at Industrial Alliance Securities, said by phone from Montreal. The company is unlikely to see significant redemptions or other partners moving until the second half of 2019, he said.

Filling Hole

Aimia is searching for a new partner for its travel rewards program to fill the hole that will be left when Air Canada’s contract ends. It has changed some management roles and reduced the size of its board. Bondholders will see their debt mature before the Air Canada contract expires. Shareholders had their dividend eliminated.

It’s too early to expect any details on a new partner with the second quarter results, Linsdell said. The company will likely wait until it’s near the end of the Air Canada contract to make an announcement to avoid any competition between the airline and a new partner, he said.

Redemption Costs

“Undoubtedly everyone wants to know what the plan is going to be for the air travel rewards partnership,” he said. “There’s really nothing about the Air Canada situation which is going to be seen in second quarter, or even third quarter or fourth quarter results.”

A spokesman for Aimia declined to comment. Aimia reports earnings after the markets close on Wednesday with the earnings call the following day.

Gross billings, proceeds from the sale of loyalty points and other services, can be expected to decline 8.2 percent in the second quarter to C$515 million due to asset sales, Linsdell said.

Analysts expect Aimia to report adjusted earnings per share of C$0.17, down 50 percent from a year ago, and revenue of C$495 million, according the average of estimates compiled Bloomberg.

Cost Savings

A key risk for Aimia looking forward is its C$2.2 billion in deferred future redemption costs, with Aeroplan accounting for about C$2 billion of that. It could face a serious liquidity challenge if clients become concerned about Aimia’s ability to continue and start aggressively cashing in their points.

RBC Capital Markets analyst Drew McReynolds said he’s not expecting a material change in Aeroplan member behavior in the second quarter, but suggested this is a key metric to watch as 2020 draws closer. Even minor changes to gross billings and redemption rates have a “material impact on the funding gap,” which in turn has significant implications for free cash flow and Aimia’s balance sheet, McReynolds wrote in a note.

If Aimia can realize its targeted cost savings, sustain its current level of free cash flow generation, use its C$300 million cash reserve and divest some assets, that would “go a long, long way to easing balance-sheet concerns,” McReynolds wrote.