Avation (AVAP)

[Carcosa]

Hi JWK,

Jeff has been involved with commercial aviation his entire adult life. I don't see him as wanting to sell up for a quick buck. Publicly he tries to avoid making any statements about selling Avation but over the years he has implied it would have to be hefty premium, and he has let slip something around the 600p would get him interested. That's about x2.1 NAV. It's not an unthinkable number but the stars would need to align!

I did query him as to whether or not having a low LTV ratio would make Avation more attractive to an acquirer but he replied it would make little or no difference. Not sure I understand the reasoning for that but may be it has got more to do with cost of debt than LTV. Perhaps a lower cost of debt is the real driver, as you mention in your post. However as you can see from recent posts of mine Avation's actual cost of debt is very competitive but whether or not that can be translated to new aircraft is doubtful. So perhaps he is doing his damndest to get cost of debt reduced now knowing that going forward its going to increase significantly plus I wonder if he is putting new deals on hold until interest rates start declining; but then with an inverted yield curve, shouldn't that imply signing new business now is an ideal time?

What I find interesting is why Avation are not taking on new business and indeed in the recent past I speculated some of the new AirBaltic aircraft which Avation have been invited to bid for is unlikely to be won by Avation as they 'seem' to be shunning new business, currently.

Avation has 28 ATR options at a runrate of 6 options per year until 2027. That's practically more than doubling the current ATR fleet size. So is Jeff preparing the ground work for that? Will he be selling of some of the unencumbered aircraft? I really want to hear his thoughts on that.

When Chorus Aviation bought 6 ATR's from Avation in 2017 I think Jeff found the large reduction in fleet/income more difficult to recover from than envisaged at the time, so in principle I believe he is against selling a large portion of the fleet again unless well above book value and as a means to an end of financing these 28 ATR's.

In April 2020 AVAP announced a Strategic Review and Formal Sale Process to maximise value for shareholders at a time when P/NAV was ~0.8. Currently AVAP has a P/NAV of ~0.5. Castlelake Aviation and others have seemingly gone an acquiring spree recently buying assets above book value, suggesting corporate activity is rapidly recovering from the pandemic. Come the next investor Q&A I intend to raise this point but based on Jeff's history he may indeed reply with a non-committal response.

So, in answer to your question, I don't think cost of debt is currently a factor in deciding to sell the company.

An awful lot of speculation on my part.

[jwk88]

Thanks Carcosa. Your contributions on this forum are tremendous and I always appreciate your perspective.

[Carcosa]

Not much Avation related news this week so I've added a bit about Avation as a declining quality company....

Weekly news associated with Avation's business sector

Ratings
On August 4, 2022, S&P Global Ratings raised the long-term issuer rating on Avation to 'B-', with stable outlook, from 'CCC' on improving capital structure and liquidity. At the same time, S&P raised the issue rating on Avation Capital S.A.'s unsecured notes to 'CCC+' from 'CCC-.

These were reviewed again on19 April 2023, with no changes being noted. There should be another formal review a few weeks after the final results are published.

For a glossery of S&P rating terms see this link

European Funding
From January 2024, banks in the European Union will have to disclose their green asset ratio (GAR) for financial year 2023, providing evidence that activities financed meet sustainability criteria under the EU Taxonomy. In theory this should be advantageous for the likes of Avation given their ATR and A220 aircraft (also remembering that Avation managed to have their first 'green' financing in December 2019


Lessor Backlogs
Top 10 Lessor Order Backlogs



Due to the multi-year long lead times quite a few of these orders will be speculative.

In an aircraft supply bottleneck, the lessor has more control over lease rental pricing. This is compared to an operator receiving multiple lessor offers for Sale and Leaseback.


Avation PLC - Decreasing Quality
I thought I would point out the decreasing quality of Avation. Over the last few years Avation has decreased its fleet size from around 50 aircraft pre-pandemic to 36 aircraft; so around 30% reduction. Furthermore over the past three years, the company had suspended new aircraft expenditure, with the next delivery resuming in early 2024. The reason for this was for liquidity purposes following airline bankruptcies/non payments. Additionally, Avation 'got lucky'(?) with increased interest rates which significantly bolstered the value of their ATR options and supported the aircraft valuations. The average fleet age in 2019 was 3.4 years. Now it stands at over 6.2 years. The remaining lease term of its fleet has also reduced to less than 5.3 years, compared with 7.5 years over the same period. This makes the fleet less attractive to acquirers and investors.

A shrinking asset base and growing fleet age weakens the company's business risk profile.

In a recent post I mentioned that when evaluating an aircraft lessor, the credit quality of their customers is important. Avation has significant exposure to Vietjet and AirBaltic, by net book value, while its top-five lessees contribute more than 70% of the income. This is slightly more concentrated than in 2019.

With the threat of harsh environmental regulation on the horizon lessors could end up with reduced aircraft values that could impact the returns. In comparison with other lessors, Avation should fare pretty well but the A330/B777's are definitely the outliers in the fleet.

Disregarding the two ATR's set for delivery in 2024, if Avation are not announcing new aircraft/customers by around Q1/24 then I would be more inclined to either stop buying Avation shares or indeed become a seller because the current fleet reduction policy will not be sustainable and will diminish the company's long-term cash flow and earnings quality.

The good news is that the market, demand, and ATR options provide a pathway for returning to growth.

Financially, if EBIT interest coverage and ratio of funds from operations (FFO) to debt approach 1.3x and 9%, respectively then that would be heading in the right direction and will contribute to improved credit ratings.

[Carcosa]

Trading Update

Avation released an oddly timed Trading Update RNS at 18:30 (UK time) last Wednesday. As is often the case with Avation, it raised more questions than it answered.

The update stated that they expect lease revenue for the year to be approximately US$90m. Avation has renegotiated payment terms with most airlines. Taking into account aircraft sales and the lack of income from some aircraft, I believe they are invoicing around 88% of the lease payment value that would have been received prior to the pandemic. They anticipate recovering some of the lost revenue at a later date.

Unfortunately, they are not currently collecting all their invoices, achieving only a 93% collection rate (more details on that later).

However, I am hopeful for a substantial increase in 'Other Income', mainly due to the start of repayments on the US$25.9m interest-bearing loan from Philippine Airlines (commenced in January 2023 in equal installments over 24 months), along with the $9m already recorded in the H1 results.

The update mentioned that aircraft market values have largely recovered, especially for narrowbody aircraft, which have seen an increase in early 2023. This shouldn't come as a surprise to readers of this board. Note that this refers to 'market value' and not 'base value'.

There is no new information provided about the ATR options. However, it's worth noting that I expect an additional increase in the value of those options since H1 due to higher interest rates (the US$ 1-year spot yield has increased by 15% over the last 6 months and 95% over the last 12 months).

On the downside, the equity held relating to PAL has decreased by around 9% even with a stagnant exchange rate over the last 6 months. This should result in a decrease in value of approximately $1m.

"Avation is in the process of finalising the sale of an unused ATR 72-600 aircraft, which is expected to be completed in early July". This refers to the previously announced Air Tahiti aircraft.

"Additionally, the company has entered into a lease agreement starting in August 2023 for another unused ATR 72-600 aircraft. After this sale and lease back is completed Avation's fleet will be fully utilized for the first time since early 2020".

However, I am now confused. Referring back to the trading update on May 10, 2023, Avation mentioned "TRADING UPDATE AND FULL UTILISATION," so it's unclear which aircraft they are referring to. I am unsure if this is something new that has occurred in the last few months, or if I misread the RNS. It is the first time in years that I have lost track of an aircraft. If anyone has information about this specific unutilized aircraft, please let me know.

Now for the bad news...

The collection rate of cash compared to contracted revenues for the year ending June 30, 2023, was 93%, compared to 91% last year. I was expecting a significant improvement, but unfortunately, that hasn't been the case. Even this improvement is likely to be the result of getting rid of aircraft rather than any actual 'real' increases in collections.

"The trade receivables include a significant amount of rent and other arrears due from an airline customer in Southeast Asia. The company is actively engaged in discussions with airline customers who are significantly in arrears, including payment plans. While Avation believes that all its customers will fulfill their obligations, there is no guarantee that the company will recover all outstanding balances. The company will review its provisions against such trade receivables before announcing its full-year results."

This paragraph is unclear. Are they referring to one airline or several? Will the existing ~$12m provisions increase, decrease, or remain the same? Are they talking about rental payments, failure of payment plans, or loan repayments?

Assuming Avation would not mention this unless it's a potential negative, my guess is that it's probably PAL again, either not making their loan repayments or struggling with a payment plans. This could have a negative impact on how shareholders view the company when the results are issued. PAL Holdings (Parent company of Philippine Airlines which is not listed) posted an operating profit of $135m and a small but positive net profit. Alternatively, it could be VietJet, as they are known to have missed lease payments on three non-Avation aircraft and is currently subject to a English High Court case but that situation seemingly arised following the transfer of aircraft between lessors whilst being operated by Vietjet. Other than that I do not see any other reports about VietJet not complying with their leasing obligations. VietJet reported a profit of $38m for Q1.

Overall, this Trading Update is not as positive as I expected, and other investors seem to agree, given the 5.3% decline in the share price, on a generally poor day for the markets (FTSE 100 down 2.2%, FTSE 250 down 2.6%, and AIM All-Share down 1.5%).

Avation's shares are still trading at around 0.5 P/NAV, with reduced debt and more unencumbered aircraft. They are earning decent interest on their cash, but generating real cash inflows remains surprisingly challenging. I expect poor revenue recognition, but beyond that, a much-improved overall financial performance. I 'hope' this sets up the company for fleet expansion in 2024/5, but it would be helpful to see decreasing US interest rates because the number of new ATR orders received this year by the manufacturer has been relatively small; albeit with a big backlog to get through.


Weekly news associated with Avation's business sector

Further to my recent posts regarding Avation's options, aircraft valuations and ATR/Airbus production constraints, Jeff Chatfield discusses his views here. (shame that the interviewer hasn't got a clue; probably wins the award for the least probing interview of all time and asks some really dumb questions). Also interesting to note is the continuing fact that Avation are far more publicly engaged with investors than in prior years.

The IBA team (IBA is the leading aviation data, intelligence and advisory company) discuss ESG rules and regulations affecting the aviation industry in this two minute video. Covering everything from EU-ETS & CORSIA to Sustainable Aviation Fuel (SAF) & ESG-linked finance.

[Carcosa]

It took a day or two before investors cottoned on to the less than ideal trading update last week causing the share price to decline best part of 11%. Hopefully that will cause Avation to put a positive spin in the actual results. It can't all be accounted for by exchange rate movements

The 'big boys' are making all the headlines with significant orders, options, equity investments, revenue and profits but not much news this week in the world of Avation.


Weekly news associated with Avation's business sector

777 Partners to order 100+ ATR's
The $10b US investment fund 777 Partners made the following statement; "777 is in discussions with ATR on an additional opportunity that includes aircraft, technology and airline services and if firmed up would put the committed aircraft purchase agreements into the triple digits," the firm said in a statement."

The company certainly has some diverse investments, from football clubs to three airlines. There is a lawsuit against them in relation to their Bonza airlines whereby they are accused of setting the airline up to fail through costly aircraft lease deals. Furthermore they have had B737's re-possed for non-payment of the leases. Hence overall you would have to question the credibility of 777 Partners and if 100+ ATR's would be ordered then might find ATR refusing to tie up 3+ years of production for a single airline. 777 Partners appears to suffer from a credibility issue.


VietJet A321 Resolution
It appears there is some progress for the return of four A321's from Vietjet in which a dispute arised with an Aircraft leasing fund although the legal arguments are likely to continue for years. There are legal activities in London, Hanoi and now Singapore. I previously posted about this in recent weeks. This interesting Bloomberg link appears to lay out the facts.

Of particular note in the Bloomberg report is "...chief executive of FitzWalter Capital’s aviation business, said VietJet appeared to have the money to make good on its payments and had simply chosen not to."

This would tend to support my view that Avation's concern over one of it's S.E. Asian customers is indeed Philippine Airlines.

[jwk88]

Carcosa,

Do you know how ATR would prioritise purchase rights if somebody like 777 had 100s of Purchase Rights and Avation (or any other customer) also had Purchase Rights to exercise so ATR wouldn't have capacity to meet demand?

I have a Capital Markets background (hence my theory expressed in a previous post that cost of debt is the real issue) and am new to aircraft leasing. The share price is down as you point out but the volume is interesting to me. Bloomberg shows that 1,010,000 shares traded on 6 July (after the Trading Update) at 121p. Of the 1,746,943 shares traded since the Trading Update, the volume-weighted average price is 116p. There hasn't been much volume at lower levels.

Cheers
JWK

[Carcosa]

JWK,

When purchase rights* and purchase options are entered into they each have an associated expiry date. For example see page 138 of this document They can, and do get amended time to time if ATR and Avation so agree.

If 777 Partners were to place a very large order then I would expect it to be announced as something like 25 aircraft firm orders and the rest as options. That way as blocks of aircraft are delivered to 777 then the options would be turned into firm orders. Given the order backlog, unless 777 were to wait for 2-3 years then ATR would have to increase their production rate (which I think is very very difficult) or 777 would do a combination of accepting aircraft from other airline cancellations, negotiate with other airlines to mover their production slots and negotiate with the likes of Avation who have the largest bulk of the purchase rights to use their production slots. In effect selling the purchase rights (which Avation have done in the past). Additionally 777 could lease the aircraft via Avation and other lessors; unless of course 777 intend to be the lessors themselves. There may even be the occasional existing aircraft to be temporarily leased to 77 Partners too. It might even be worth 777 Partners time to bid for Avation

Having said all that I find it difficult to believe 777 are a credible entity for buying such a large number of ATR's.

*Avation say that all of their purchase agreements with ATR are Purchase Rights which, given the large number, seems a bit odd to me. Normally I would expect most of their forward purchase agreements to be options. I do wonder if Avation were 'forced' into converting the options (nil cost?) to rights to a) help support ATR during the pandemic or b) was an inspired decision on behalf of Avation. These purchase rights have had to been paid for with cash (plus further payments due 12 months and 6 months prior to delivery.

Given your Capital Markets background then I think (although woefully out of date) the link I provided earlier in this post would be far more educational than anything Avation have published via RNS. Would really appreciate any insights you may glean from that document.

[Carcosa]

Recent share price action has resulted in a P/B of ~0.4. Avation is offering excellent asset value. Avation and other lessors are disposing of aircraft above book value. Admittedly a single ratio does not constitute the be all and end all of Avation as an investment but P/B or P/NAV ~0.4 is noteworthy. It may be worthwhile to compare P/B with the bigger leasing companies.



Other P/B examples are:
Air Lease Corporation: 0.75
AirCap: 0.97
BOC Aviation: 1.12

These larger lessors 'should' command a premium over Avation given their fleet size and credit ratings but even so, such a large gap seems unwarranted.


News - There is none.

Not much news relating to Avation's business this week but I was surprised to come across this resource which is typically found behind IBA's paywall. The data is as of April 2023.

The data shows that a new ATR72-600 has a Current Market Value of $21.82m. The book value for a new aircraft should be practically the same as the sales price from ATR (also you can see A220-300 prices too; for reference Avation's aircraft cost ~$34m). It seems that Avation's A220's market price is outpacing depreciation and with strong upward momentum from ATR's the fleet NAV continues to look good.

Also of note, across the board really, is that lease rates have increased significantly. To put that in context most of Avation's ATR lease yields are around 8-9%, the data suggests airline lease costs have gone up as much as 40%; which re-enforces Jeff's recent Bloomberg presentation that those lessors that can remarket used aircraft are likely to perform exceptionally well.

Warrants
What about the Warrants? If anyone is able to buy the Avation Warrants (AVAW- https://www.londonstockexchange.com/sto ... mpany-page) at anything like the prices being quoted (50p ish) and are able to exercise with the ordinary shares >114.5p before 31 October 2026 then some large profits could be made. (As am overseas I can't find a broker to trade them for me). That 114.5p should also provide some impetuous for the company too as these warrants were originally issued for the staff, I think.

[Clitheroekid]

If anyone is able to buy the Avation Warrants (AVAW- https://www.londonstockexchange.com/sto ... mpany-page) at anything like the prices being quoted (50p ish) and are able to exercise with the ordinary shares >114.5p before 31 October 2026 then some large profits could be made. (As am overseas I can't find a broker to trade them for me). That 114.5p should also provide some impetuous for the company too as these warrants were originally issued for the staff, I think.

I tried with my brokers, Interactive Investor, but they said that for some reason they could only sell the warrants, not buy them.

The person I spoke to didn't know the reason they were unable to buy them, but it would be interesting to know whether other brokers are able to do so.

[jwk88]

Carcosa,

(1) Thank you for sharing the OM. Page 138 of the OM states that the ATR Supply Agreement is "subject to, among other things...no material adverse change in the financial condition of the Guarantor that would jeopardise the availability of financing for such Additional Aircraft."

Are you familiar with the changes that ATR considers to be MAEs? I note Avation plc (the "Guarantor") is currently rated B- (4 Aug 22 RNS), similar to B+ when the OM was issued (17 Apr 18 RNS).

(2) In addition to being inexpensive on a P/B or P/NAV basis as you point out, the other lessors that you mention (Air Lease, AerCap, BOC) are trading at or above their Q4/19 (pre-COVID) share prices. In the case of Avation, I believe the explanation for our discount is Mr. Market concluding that Avation is a "value trap" for the time being.

(3) The 114.5p warrants discussed in Posts 603624/603722 were not issued for staff. Rather, the 6 million 114.5p warrants expiring in 2026 were issued to 2021 Noteholders as part of the negotiation to "amend and extend" the 2021 maturity to 2026 maturity (09 Feb 21 RNS). However, management owns other warrants. I calculate that Mr. Chatfield owns over 2.4 million warrants with strike prices between 102p-130p.

[Carcosa]

Clitheroekid; Interesting. Hopefully someone else can suggest a broker that can deal in the warrants. Not listed on Interactive Brokers either.

jwk88:
Am not familiar wrt what ATR would consider to be material changes; I can only assume it's a near force majeure type situation otherwise ATR could be accused of forcing a company out of business??

Aircraft Purchase Options are paid for (although at the moment Avation do not have any such options) and Purchase Rights have no associated cost until they are converted into firm options at which time an option fee is payable. However the Purchase Rights do appear to have a value of $68m/28 aircraft.

It's human nature to try and find reasons as to why a particular share is trading at a particular price. Again, can only speculate.
There is only one pure aircraft leasing company trading on the LSE so UK market has very little experience.
The ex Finance Director over simplified the business during his multi-year presentations to retail investors
Aircraft leasing is not suited to making a quick-buck for retail investors
People still remember the downfall of Guinness Peat. See here and here
Investors prefer to see EPS organic growth than accounting 'tricks' (which I can readily identify with)
There remains significant risks with Avation; for example those aircraft purchase rights increased in value by 140% last year. If that unwinds just as dramatically then that would be a significant negative event. Additionally we have risks that are non-zero that Avation may not be able to get their VietJet aircraft returned and potential continuing non-payment from (I think) Philippine Airlines.
Valid concerns over non-payment from other operators
Aircraft portfolio decreasing in quality
There are much better companies to invest in that Avation!

So, many reasons to avoid Avation.

The market needs a reason to see things are improving over and above accountancy tricks. They need to start making a move away from liquidity measures to renewing the fleet, increasing revenues, a path back to dividends; but of course it also needs liquidity! I do hope that the next Avation presentation will provide more guidance.

The warrants. You are 100% correct. Sorry about that error. Was thinking about the recent employee warrants.

Maybe this Friday I will review credit ratings across the industry...

[Carcosa]

Following on from last weeks post I thought I would compare credit ratings of Avation with other lessors. Before that, a question, why isn't Avation using its authorised remit for a share buy back given the current Price to book?

It should be noted that Avation credit ratings will again be reviewed post result announcements but as they stood on August 4, 2022, S&P Global Ratings raised the credit rating on Avation PLC to 'B-', with stable outlook. That basically means Avation currently has the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the Avation's capacity to meet its financial commitments. I think purely from an outside observers viewpoint that seems an honest appraisal.

Japanese Credit Rating Agency Ltd appear to have dropped Avation as I can't find the company listed on their website.

Fitch withdrew their ratings analysis for Avation a while ago but as Fitch issued a peer review of aircraft lessors recently it's the only central source of ratings that I can find. The overall structure of credit ratings between Fitch and S&P is very similar.

AerCap ‘BBB’/Outlook Stable;
Air Lease Corporation ‘BBB’/Outlook Stable;
Castlelake ‘BB’/Outlook Stable;
China Aircraft Leasing Group ‘BB+’/Outlook Stable;
Macquarie AirFinance ‘BB’/Outlook Stable.
Avolon ‘BBB-’/Outlook revised to Positive from Stable;
Dubai Aerospace Enterprise ‘BBB-’/Outlook Revised to Positive from Stable.
Aircastle ‘BBB’/Outlook Stable;
BOC Aviation ‘A-’/Outlook Stable;
SMBC Aviation 'BBB+'; Outlook Stable.

So overall Avation, a minnow in the industry, has poorer ratings than any of the above.

Wiki S&P Ratings description
Wiki Fitch Ratings description

There are numerous factors that affect how a rating agency views an aircraft lessor. Quality of assets (fleet size, varients, age), quality of customers and obviously the financial performance of the leasing company. All stuff that we have posted about before.

Watchers of Avation will have noted that the company has spent the last 18 months reducing its debt and improving its liquidity, but lets take a look at some other Avation metrics.

Loan to Value:
Within the industry, this is often taken to mean Loan/Fleet Value (Rather than total assets, i.e. ignoring cash) as this provides a measure of 'quality/risk' and can be useful for comparing different leasing companies. Historically something around the 70-80% LTV is commonplace and I see Avation currently around the 74% figure which is one of the lowest they have had for years.

Leverage:
This used to be so easy to find out before the introduction of IFRS 16, as lease liabilities did not appear on companies' balance sheets prior to IFRS 16. If I have accounted for those leases correctly (no guarantee I have) then get the balance sheet leverage of x5 which is largely in line with historic figures for Avation but remains stubbonly high compared to industry norms and is in the rarified atmosphere of non-Aviation businesses!

Return on Equity:
Got to be honest here. ROE has never been great with Avation. I'm forecasting 4.2% although that number can be widely out (both upwards and downwards).

Typical Ratings criteria/targets are:
Net Debt to Equity to be < x4, EBITDA to Interest Ratio to be >x2, EBIT Interest Cover above 1.5 and Funds From Operations to Debt to be in the 7-9% range.

Best I can do is to estimate that 2022 results will meet all these critieria except EBIT interest cover which I estimate will be ~1.25. Certainly all was ok based on the last Annual Results. Also the asset quality declines with time.

Overall my feeling - and it is a feeling because I have no experience of rating agencies - is that Avation have not done enough to move the needle on its credit rating. Having said that I think the best rating Avation obtained in its history is B+

Despite recent share price weakness, the share price is up 7% YTD and 48% over 12 months. Small comfort for some perhaps. Unless Avation pulls something out of the bag come results day I would not be suprised to encounter share price weakness on the day.


Pre-Delivery Payments
PDP's or Pre-Delivery Payments. For us investors the only thing you need to know is that PDP's can amount up around 30% of the purchase price. If you want a much broader explanation then see this link https://www.vedderprice.com/-/media/fil ... action.pdf

I assume that both Avation's 2024 ATR's remain in storage at ATR, since Avation have not taken delivery of the aircraft. I think their ongoing payments would be Storage fees, Insurance and Interest (assuming its financed from the warehouse facility). The full payment will be made upon delvery. Remains a mystery to me as to why these two aircraft are in storage for so long. Perhaps more will be ascertained when we know who the ultimate customer is.


Weekly news associated with Avation's business sector

Latest industry trade reports indicate that ATR72-600 lease rates are improving from the COVID-19 period, while Dash8-400 rates continue to decline. Lease rates for ATR72-600s have increased by around $10,000 per month over the past year, with rates now ranging from $65,000-$95,000 per month depending on aircraft age. New aircraft deliveries have been advertised at $180,000 per month. Maintenance reserves have increased to reflect higher OEM parts and labor costs (so keep an eye out on this in Avation's results). Parts prices are up by as much as 11%. Higher lease rates don't necessarily translate to higher lessor margins, but rather reflect changes in interest rates and other associated costs. Any new readers should be aware that once agreed, lease rates to customers rarely change outside a pandemic.


SMBC Aviation's second bond issuance this year; 10-year offering priced at a 5.7% coupon on 18 July. Initial thoughts suggested the 10-year offering was 215-220 basis points (bps) above US Treasury, but was actually launched at 195 bps over Treasury.


Pratt & Whitney has flagged (another) issue with powder metal used to manufacture turbine discs in the PW1100G engine powering the A320neo, which will impact at a “significant portion” of the global fleet. That's 1200 out of 3000 engines that need removing, partial disassembly and inspection. What this may mean for Avation is a small bump in the value of their A320/A321's and a tiny increase in the possibility of lease extentions (okay, am really grabbing at straws here but, y'know)

[jwk88]

Before that, a question, why isn't Avation using its authorised remit for a share buy back given the current Price to book?

Carcosa,

I agree that a buyback is accretive given the current P/B. However, I'd add that Jeff has been consistent in recent public commentary (earnings calls, Bloomberg webinar, DirectorsTalk interview) that he prioritises debt payback at the moment. He said on the Bloomberg webinar that Citi remains "involved in the company in the background" after advising on the $100M tender offer (which was woefully undersubscribed).

I am increasingly of the opinion that Jeff and Oceanwood ultimately need to sell Avation to maximise the value of their shares. Avation is too small for Oceanwood to exit its investment (c.16 million shares) in the ordinary course in the stock market, in my opinion. As for Jeff, ultimately Avation's IP is its management experience which will be substantially eliminated when Jeff (turning 60 next year) retires, especially after Rod Mahoney retired. Instead, I believe Jeff's value would be maximised by selling the company to a North American or European lessor that values his Asia-Pac experience. As Jeff said on the Bloomberg webinar and DirectorsTalk interview, there are new financial entrants in the narrowbody/turboprop market. In my opinion, they would value his experience and have a lower cost of debt. They could renegotiate an employment agreement with Jeff to offer him substantial upside and a lower cost of debt. Pure speculation on my part!!

Regarding your earlier post discussing the Asian customer behind on its payments, I note that Vietjet fits the description. Aviation referenced an airline customer (singular rather than plural "customers") and we know Vietjet's COVID arrears were converted into a loan. In my opinion, the RNS disclosure is consistent with Vietjet but we shall see soon!

[Carcosa]

jwk88,

Great post again. Certainly Jeff is a dyed in the wool aviation guy. The commercial aircraft industry remains a closely knit community, despite its size. I agree that Jeff's experience is particularly valuable. For him to work for someone else though probably goes against the grain. Given he has lived in Singapore for ~20 years since giving up the airline business, the lifestyle and work challenges are something he may find hard to breakaway from. Selling Avation as he tried to do prior to the pandemic suggests he is a willing seller though.

Being so focussed on reducing debt is noteworthy and should be helpful in the long run when they will probably be in need of a lot more financing to deliver on the ATR purchase rights; at which time customers will be locked into relatively high lease payments as interest rates fall enabling Avation to refinance at lower levels. But there is possibly a long wait over the next 2-3 years waiting for that scenario to pan out.


Weekly news associated with Avation's business sector

DAE Capital
DAE Capital (Dubai Aerospace Enterprise) will wait to refinance its peak maturities next year in the hope that borrowing costs improve “The rates are not very attractive for us to consider looking at refinancing at this point. We have one year, and we will be looking for opportunities in the market to adjust that maturity,” said Sinan Kahya, CFO of DAE Capital, on an earnings call.

Actually I could not find anything else mildly relatable to Avation, so just some random snippets...

Aercap
Aercap's average core cost of debt was 3.4% for the second quarter of 2023 and 3% for the same period in 2022. Adjusted debt/equity went down to x2.51 from x2.8. In comparison to some of the figures I posted last week you can see the benefits of scale!

Global Airlines
As an aside, I think I have mentioned here and elsewhere about an 'influencer' trying to start an A380 airline. For a bit of light relief, have a read of this.

[Carcosa]

I really should start a separate topic on the subject of Global Airlines A380's. I have no investment interest whatsoever in Global Airlines. I find the whole sorry saga funny and wonder if in a few years there are going to be some jail sentences handed out.

The latest story - largely from their own investment pack (of lies) seems to indicate that they want to procure 65-75 A380's...

It has been suggested the ability in the US to accelerate the depreciation of A380s is what is behind the deal. By being able to deduct more depreciation expense upfront, accelerated schedules can provide a tax benefit and positive cash flow impact, even if the asset is not fully paid off.

They also say themselves that they have acquired the aircraft at $4m each. Hugely less than the claims from recent press reports. Furthermore even more outright lies have apparently been proved by suppliers saying that they have had no dealings with Global Airlines despite Global claiming they are partners/suppliers etc., plus their claims regarding government approvals are false.

More info here.

Apologies for being off-topic.

[Carcosa]

Avation Related News

Vietjet
Vietjet after tax profit for H1 (30 June 2023) was $16.3m), five times greater than the comparable period and revenue increased by 87% with debt to equity ratio of 1.2, credit rating of BB+ /stable, albeit from Saigon Ratings.

Looking for Aircraft
Dubai headquartered Hilshaw Group, has a JV with Aeolus to build an initial portfolio of 20 commercial aircraft available for leasing, including regional aircraft.

Dredging the bottom of the barrel for news
Island Aviation Services, owner of the Maldives’ national airline, Maldivian, recently launched another request for proposals (RFP) to finance the delivery of two new ATR42-600 turboprops.

[Carcosa]

If you are a total contract geek then here is an actual contract for 20+20 ATR72-600's operated by a Brazilian airline.

News Related to Avation:
EVA Air (AVAP customer) reported H1 net profit of $352m

[Carcosa]

Another Gain of Millions?

The problem for lessors that have too much debt coming due at once with long term rates, is that if they are not hedged appropriately, they could get caught out where the return on equity implied by the lease rates is not generating a sufficient return for their shareholders.

Avation uses interest rate swap contracts to manage its exposure to fluctuations in interest rates on its loans and borrowings. Additionally they have cross currency swaps and foreign currency hedges. The change in the fair value of these derivatives in 2022/23 amounted to a gain of $35.4m resulting from a mark-to-market gain on the derivative valuations. Very very significant for the headlines.

The gain stemmed from Avation having favorable fixed rates locked in on its swap contracts compared to rising market interest rates during the year.

The total notional value of these derivatives were reported as $252.4m so that increase of $35.4m represents around a 14% gain.

So the question is what can we expect from Avation for year ending June 2023?

Well in part it requires use of the Black-Scholes Model to price those derivatives. The Black-Scholes equation requires five variables. These inputs are volatility, the price of the underlying asset, the strike price of the option, the time until expiration of the option, and the risk-free interest rate, plus a host of other assumptions. All of which I have no idea about except we all know that interest rates have moved north over the last couple of years.

Empirical studies have found that a 1% change in interest rates leads to approximately a 3% change in call option prices and a 1.5% change in put prices, holding all other factors constant.

For reference, during Avation's fiscal years the change in US interest rates was an increase of ~2% in 2021/22 and ~3% in 2022/23.

Please note I don't really understand much of this and it may be all hogwash but as things stand I would expect another gain from the derivatives to be booked by Avation but have no idea about the quantum....$1m or $50m+... Absolutely no idea. Who knows, maybe a loss too.

It would be great to get the input from someone far more qualified than I regarding this matter.



News Related to Avation:


FTAI Aviation
FTAI Aviation (american aircraft but primarily engines lessor) reported it is seeing improved opportunities for sale and leaseback deals and acquiring lease-attached assets at attractive prices, as mid-tier lessors struggle with limited and expensive debt financing (really re-iterating what Jeff said during the Bloomberg presentation).

The used aircraft market is tightening, especially for last generation A320s and 737-800s, as airlines hold onto these aircraft longer due to issues with Pratt & Whitney GTF engines.


Air New Zealand
Air New Zealand (ANZ) has placed 2+2 orders for ATR72-600 aircraft with deliveries scheduled for the second half of 2024 and early 2025 (That timescale is consistent with previous comments from Avation). By 2025 ANZ will operate the 4th largest ATR fleet worldwide with 29 ATR72-600s after previously ordering the model to replace older ATR72-500s. Seems to me that this would be an ideal customer for Avation but historically ANZ has financed ATR deliveries through internal cash and Japanese tax lease products. It last closed a Jolco financing on two ATR72-600 deliveries in 2019 along with Showa Leasing and ING bank on the debt side.

[Clitheroekid]

It would be interesting to know if the valuation placed on the Standard Chartered business has any implications for the value of AVAP, and whether it indicates the possibility of an approach being made at some stage - https://www.reuters.com/business/financ ... 023-08-28/

[Carcosa]

Avation's Purchase Rights

Purchase rights have no associated cost until they are converted into firm options at which time an option fee is payable.

Avation have 28 ATR purchase rights, subject to, among other things, the availability of aircraft and no material adverse change in the financial condition of Avation that would jeopardise the availability of financing for such aircraft. The purchase rights expire by June 2027. In other words, I beleive the 28th aircraft must be converted into a firm aircraft by that date; meaning the other 27 have to be firmed up prior to June 2027.

Avation has to provide written notification of at least 18 months prior to the proposed delivery of the Option Aircraft.

Given the above, that implies Avation needs to start converting these purchase rights at a rate of more than one every two months into options from now in order to meet the 28th aircraft June 2027 target. That would be a huge challenge, even for a lessor much larger than Avation. One which I would say a lessor of Avation's size and capacity is unlikely to meet unless it was with a customer interested in procuring aircraft in bulk; and in that case the larger lessors are far more likely to win the business.

Granted that the ATR Supply Agreement allows for some rescheduling of these Purchase Rights dates the overall impression I have is that Avation has a challenge on it's hands. Should be noted that in 2021 it was agreed that to reduce Avations committed orderbook from eight ATR's to two (Likely one of those two ATR's is destined to US-Bangla Airlines, s/n 1649 Regn S2-AKQ)

Although the Rights are at nil cost to Avation they do have considerable value to the company and presumably they do not want them to expire worthless. (Technically they cannot sell the rights to a third party but there are ways around that e.g. Avation places the order using the Purchase Rights but the airline/financier/other lessor takes delivery of the aircraft and Avation walks away).

The likelihood is that Avation are likely to make a financial gain on these Purchase Rights again for 2022/23, provided they are not forced to let some of them expire.

Clearly from Jeff's public comments, and others in the industry, it is not an optimal time to place new ATR's in the market, at least until interest rates start reversing.

Avation is required to make a first pre-payment upon agreeing for the aircraft to become firm options. Avation will then be required to make a second pre-payment twelve months prior to the delivery of each individual aircraft and a third pre-payment six months prior to the delivery of each individual aircraft. This would largely be financed from the Warehouse facility.

News Related to Avation:

Competitors
Avation's principal competitors include GECAS, AerCap, SMBC Aviation Capital, Nordic Aviation Capital, BBAM, BOC Aviation, ICBC Leasing, Avolon, Air Lease, Aviation Capital Group, Aircastle Advisor, Dubai Aerospace Enterprise, FALKO, Macquarie AirFinance, ORIX Aviation, CDB Leasing Company,Castlelake and BoCom Leasing.

[b]New Mega Lessor - (Thanks Clitheroekid)[/b]
Following on from my June 2/23 post: Avilease, a Riyadh-based lessor backed by the Saudi Arabia public investment fund, has officially confirmed its acquisition of Standard Chartered's $3.6 billion aviation unit. This acquisition brings Avilease closer to its goal of becoming one of the top 10 global lessors by 2030. The operational assets are worth $700m (roughly the same as Avation's assets).

AviLease was launched in 2022 and offers leasing, trading and asset management services. The company's business strategy is to expand rapidly to become one of the world's top 10 leasing companies.

Bidders included several major lessors but needed to offer par pricing, in other words Price to book or better.

For established aircraft lessors, acquiring the portfolio would likely dilute their returns because buying these assets represents purchasing growth, rather than generating it organically. As such, the deal makes most sense for a new entrant backed by strong financial resources. They can accept lower returns in exchange for quickly scaling up their business. This logic explains why Avilease, a new Saudi-backed lessor, was interested in acquiring the portfolio.

Avilease states they are interested in a portfolio of the latest generation, environmentally friendly aircraft, on lease to commercial airlines (and also ordering new aircraft). Sounds a perfect fit to takeover Avation but unfortunately they publicly say they are only interested in Jet aircraft. However, maybe that could change as I have written to them extolling the virtues of Avation plc .

The lessor has stated they want to double the fleet size post this latest deal. Now would they like to purchase nearly a billion dollars worth of ATR's?

VietJet
The airline has amended its fleet roll over plan and currently expects to complete the transition rom Airbus to Boeing narrowbodies and grow to 50 aircraft by 2028. That explains why the six Avation A321's leases expire that same year and hence we have to assume there will be no lease extensions forthcoming.