Avation Share Discussion Threads

[russman] 29/1/2021 21:21

Bondholders are estimating credit risk. AVAP bonds have a high risk to capital i.e might get a haircut.
Do not confuse with equity risk; use CAPM to map the convergence to the May deadline.

[wigwammer] 29/1/2021 14:19

Thanks QP. I think Marstons was another one you called down at 30p. Genius :)

[wigwammer] 29/1/2021 14:11

Thank you for conceding that willingness to lend is based on a perception that can change rapidly. The defraying exercise you mention only makes sense if investors believe the principal will be repaid. You can't get 120% over 4 months by investing in the bonds. Can you? Pubco's in the spotlight today - highly indebted and substantially leasehold businesses hit hard by covid. Private equity interest in Marstons which had already multiplied off the lows. Pleased I own the equity and not the bonds. ATB

[cc2014] 29/1/2021 13:42

At 65c in November, you would have paid $65,000 and got back $103,000.

Which is $38,000 or 58.5% over 6 months or 117% on an annualised basis.

The yield isn't changing, it's just that the time defray has altered the maths.


One final observation. If I can get a 125% in 4 months in investing in the bonds, then by equivalence the share price would have to rise to 240p to get the same return.

[wigwammer] 29/1/2021 13:24

"The yield describes what borrowers are prepared to lend at". Which is based on a perception that can change rapidly. "No one wants to buy these bonds". The bonds were trading at 65c in November, and are 75c now. Someone is buying them, but I doubt they are buying in anticipation of an ongoing 125% return. Any good reason why this company won't benefit - and bonds and equity recover - as anticipation of an aviation recovery builds?

[cc2014] 29/1/2021 13:00

"The current yield you describe reflects a perception of a company’s ability to generate cash to cover bond payments"

No, the yield describes what borrowers are prepared to lend at. If I felt the yield at 125% was good value I would go and buy some in the market, the bond price would rise slightly and the yield dropping to 120% or whatever.

But, no-one wants to buy those bonds, even at 125%. It's telling us something.


Now consider the following. AVAP has to pay back $300m in May. If it had cash or access to cash it could buy these back itself for $225m right now at 75c on the dollar. But it can't because it isn't generating cash and no-one wants to lend it any cash.


Sure, you are right and perceptions may change but AVAP are still stuck with the problem that even if all cash-flows immediately started tomorrow on all planes, in the current climate lenders now want a higher interest rate than pre-Covid. Effectively the margin AVAP were making in the middle no longer exists.

[wigwammer] 29/1/2021 12:37

Stick to downticking, fella :)

[wigwammer] 29/1/2021 12:36

The current yield you describe reflects a perception of a company's ability to generate cash to cover bond payments - that perception can change rapidly, just like a share price. The yield as you calculate it - of course - changes as the price moves. Tail wag dog. What I'm interested in is what drives the price. So I ask again, any good reasons why investors won't buy associated bonds and equity in anticipation of a recovery in the aviation leasing market?

[wigwammer] 29/1/2021 11:58

It's a bit like Kromek. A few weeks ago, KMK traded at 10p, having fallen substantially on fears they need to raise capital. Post a strong update, the shares are now 20p+ with the ability to raise capital at a price double where they were a month ago. By CC's reasoning - KMK's cost of capital is 12 x 100% = 1200% annualised pre compoundin. Is that right, or did the sellers (including QP) just seriously miscalculate the appropriate cost of capital? So let's hear some good reasons why an aviation leasing group isn't going to see recovery as the aviation industry rebounds..

[wigwammer] 29/1/2021 11:14

With respect CC, I think the qn I pose is the more relevant one. If investors anticipate a recovery in returns, then both bond and equity prices will follow. The consensus WACC falls, anticipated returns rise, and many many moons later the rating agencies upgrade. I agree the bonds may also be interesting. Depends whether you anticipate a recovery in their operations in the foreseeable. Do you?

[wigwammer] 29/1/2021 09:48

Simple question I've proposed. So the resident downticker (only one premium member here) is either Incapable of answering or too intimidated. Either way, it's a big :) from me..

[wigwammer] 29/1/2021 09:33

This point was true many years ago, when the debt was created. Yet - the debt WAS created, and for years the returns more than justified the cost. With base rates and corporate lending rates near all time lows, and likely to remain contained for some time, and with the prospect of a return to operating normality over the next 6-12 months - especially on regional routes - there don't appear to be many good reasons to believe the returns won't exceed the cost of capital again in the foreseeable future. Unless someone can tell me otherwise?

[russman] 29/1/2021 08:26

It is a small leasing company; AVAP needs cheap debt finance to grow.
Their business model is broken if the bonds cannot be refinanced at a cheaper rate than AVAP lease their fleet out.

[wigwammer] 28/1/2021 10:38

That's true, Harrogate. But it was also true 5 years ago. Yes - the current environment is difficult. But the question is - is this likely to be a business they want to lend money against going forward? The business model is not permanently broken, they are not guilty of wrongdoing, they are not being competed out of existence. In fact, the retirement of old fleet and underinvestment by a cash strapped industry is likely to leave them in a competitively stronger position. So it is quite likely the unsecured holders accept a slightly higher coupon as compensation and avoid a situation where they may end up with nothing. Looking at the discount to book, that scenario is not one currently priced in. Re May deadline - quite possible the can is kicked once or twice before agreement is reached.

[wigwammer] 28/1/2021 10:06

266k buy trade just reported.

[harrogate] 28/1/2021 09:38

I agree with that of course in regards to rating agencies and yes the unsecured nature of the bonds doesn't help bond holders. But they still need refinancing on terms that leave equity worth more than we are at and it needs doing pretty soon. Not very liquid so not sure how real it is but the bonds are trading at 75c/ $That seems a level that suggests a deal is coming but WTFDIK

[russman] 28/1/2021 09:33

You could (in theory) hedge the bonds with the equity.
But neither are that liquid.

[wigwammer] 27/1/2021 21:30

The maths is very simple. Predicting future returns and an appropriate WACC is not.

[russman] 27/1/2021 20:35

AVAP WACC needs to be lower than the AR on leasing out its planes.
The maths is very simple; refinancing $350m of junk on decent terms is not.