BRS - Bristow Group Senior Unsecured 6.25% 2022

[rishig]

Bristow Group was recently written up on VIC (Jan 26, 2015).

 

Summary:

Bristow is a helicopter transportation company servicing the oil and gas industry. About 90% of the revenues come from offshore oil and gas and rest come from search and rescue operations (SAR).  65% of the revenues come from production platforms and the rest from development and exploration. There are close to 8000 production platforms and even at the low oil prices most of them are profitable on a cash basis. The pricing of contracts are on a two tier basis - 65% is based on fixed standing charges and the rest on flight hours. Bristow owns 60% of its fleet and 40% of it is leased. The depreciated book value is a good proxy for replacement cost of the fleet on a very conservative basis. The VIC writeup argues that fair value of the fleet is higher because helicopters are well maintained (due to regulations and importance of safety) using power-by-hours arrangements with the OEMs and these expenses are expensed on operating basis. Even though the VIC write-up argues to go long on equity, I am proposing going long on the senior unsecured notes 6.25% 2022 trading at 60 (CUSIP: 110394AE3), up in the capital structure given the risk/reward for the notes is more attractive than the equity.

 

Capital Structure:

Senior secured:

Term Loan (Nov 17, 2015): $339M

Term Loan Credit Facility (Nov 17, 2015): $200M

Revolving Credit Facility: $232M

  Total: $771M

Senior unsecured:

6.25% notes due 2022: $402M

  Total: $1173M

Debt recourse to subs:

  Airnorth (Fixed wing subsidiary): $20M

  Eastern (Fixed wing subsidiary): $15M

Other debt (financing for aircraft): $15M

Total debt: $1223

 

Other liabilities:

Pension liabilities: $82M

NPV of lease obligations (at 6%): $525M

  Adjusted debt: $1860

 

Assets:

Current working capital: $248M

Aircraft, net of depreciation: $2314M

Investment in unconsolidated affiliates: $200M

  Total assets: $2762M

 

Business Performance (Q3 2015):

LACE (Large aircraft count equivalent): 163

LACE rate (annualized): $8.89

Revenue from helicopter fleet: $362M

Revenue from other: $33M

Total operating revenue: $395M

EBITDAR margin: 29.6%

EBITDAR: $117M

Rent expense: $52M

Interest expense: $10M

Cash flow from operations: $55M

Investment in working capital: $40M

Capital expenditures: $193M

Free cash flow: ($178M)

 

This is capital intensive business with most of the capital expenditures going towards buying helicopters and building bases. Bristow has a 10 year contract with UK govt for SAR that is being implemented. Most of the capital expenditures are to fulfill the requirements of this contract. The contract is going operational in 2017-2018. Expected EBITDAR from the contract is ~100M over the next 10 years.

 

In addition, Bristow has been worked with the OEMs to defer its capital expenditures in 2017-2020. So, it seems like they should be able to live within their cash flows unless business deteriorates further (which is possible). Also, in 2018-2020, about $70M of leases are expiring - that would help lower fixed costs.

 

Capital expenditure obligations:

Mar 16 - Mar 17: $122M

Mar 17 - Mar 18: $121M

Mar 18 - Mar 19: $61M

 

Total liquidity:

Cash: $132M

Undrawn borrowing capacity: $167M

Total: $300M

 

The 6.25% 2022 senior unsecured notes are trading at 60. S&P has a BB- rating and Moody's has a BA3 rating. It is on negative watch as adjusted debt / EBITDAR is a little over 4x and interest coverage is close to 2x.

 

Base Case:

In the base case, Bristow lives within its cash flows in 2017 and produces $50M or so free cash flow in 2018-2019 as leases expire, UK SAR goes fully operational, and capex is reduced. Leverage is reduced by about $100M (by paying down the revolver) and the rating agencies re-rate the senior notes higher causing them to go back to high 90s. Collect coupons at 10% yield for 3 years and realize capital appreciation of 50% - effectively making 80% over 3 years or 21% IRR.

 

Worst Case:

 

Let's assume the following (draconian) worst case:

LACE: 160

LACE rate: 6M (about 30% lower than today)

Helicopter revenue: $960M

Fixed wing revenue: $40M (currently about $120M)

  Total revenue: $1000M

EBITDAR: 25% (currently at 30%)

Low EBITDAR: $250M

EV/EBITDAR: 5x

EV: $1250M

 

Target adjusted debt ratio: 1.6x

Total adjusted debt (including leases): $400M

Operating leases: $280M (get rid of half of the leases in ch. 11).

Debt recovery: $120M

 

Senior debt recovery (15%): $120M

Senior equity post ch. 11: $650M

Senior equity % post ch. 11: 75%

 

Unsecured debt recovery (0%): $0

Unsecured equity post ch. 11: $200M

Unsecured equity % post ch. 11: 25%

 

By purchasing the unsecured at 60% of face value (i.e. 240M), you get 25% of asset value (i.e. $690M) post ch. 11. A fine outcome even in the worst case scenario.

 

The senior secured have two major covenants - debt / EBITDAR ratio of <4.75x and interest rate coverage of >2x. Currently, debt / EBITDAR is at 4.1x but the interest rate coverage is at 2.1x. The interest rate coverage is low because of high fixed lease expenses which are rolling over in 2017 - 2018. It is possible that this ratio may be in violation, but I think its unlikely that the secureds put Bristow in Ch. 11 over this. Very likely that the interest coverage ratio gets amended, but if not, then in Ch. 11, Bristow has the chance to accelerate getting out of the expiring leases and effectively reduce the company leverage. Note that both its competitors, ERA and CHC currently have higher leverage than Bristow.

 

Obviously, there is a whole range of other outcomes possible, but I am not sure how the unsecured notes would be impaired. The marks may go down in the short-run, but by maturity 2022, the return is very likely to be high teens with very limited risk of permanent impairment.

 

Attached the VIC write up and Moody's credit report from Jan 2016

137927.pdf

MoodysBristow.pdf

[watsa_is_a_randian_hero]

Era & PHII are two competitors whos bonds I own.

[Guest neiljgsingh]

John Rogers of Ariel Investments on BRS: "Take helicopter-services company Bristow (BRS, 20), which fell 60% in 2015. Bristow’s main business is transporting oil workers to offshore rigs. Given the oil and gas connection, some investors are quick to hit the sell button when oil prices fall. And yet most of the company’s operating income comes from a monthly “standing” charge–whereby helicopters must be at the ready in the event of trouble. Besides, at its current stock price, the company’s helicopter fleet is worth more than the value of the whole company. The shares have a forward P/E ratio of just eight."

 

http://www.forbes.com/sites/investor/2016/01/20/doubling-down-on-industrials/#7117f9b3502f

[rishig]

John Rogers of Ariel Investments on BRS: "Take helicopter-services company Bristow (BRS, 20), which fell 60% in 2015. Bristow’s main business is transporting oil workers to offshore rigs. Given the oil and gas connection, some investors are quick to hit the sell button when oil prices fall. And yet most of the company’s operating income comes from a monthly “standing” charge–whereby helicopters must be at the ready in the event of trouble. Besides, at its current stock price, the company’s helicopter fleet is worth more than the value of the whole company. The shares have a forward P/E ratio of just eight."

 

http://www.forbes.com/sites/investor/2016/01/20/doubling-down-on-industrials/#7117f9b3502f

 

I wouldn't follow any of the gurus into these "falling knives" situation without doing my own work. If the company can live through this, sure there is upside on the equity (I own the equity too), but I haven't been adding to the position because the balance sheet has gotten a lot riskier lately. They have been drawing down on the revolver (not a good sign) and are in serious need to get their capex in control and live within their cash flows.

[jeremykgold]

Has anyone looked at ERA Group common and compared to Bristow? Curious if you found Bristow more attractive, if so, why?

[rishig]

Has anyone looked at ERA Group common and compared to Bristow? Curious if you found Bristow more attractive, if so, why?

 

I found the Bristow "bonds" more attractive. I have looked at ERA - it is more levered and is less diversified, primarily in Gulf of Mexico. On the other hand, I think ERA Group's management is more sane than Bristow's. Having said that, ERA Group's bonds (7.75% 2022) are much more expensive (at 78) relative to Bristow's (55). Era's bonds are rated B- vs. Bristow's are rated B+. Both are on negative watch.

 

Attached Moody's report for Era's bonds.

 

ERA_Group_Moodys.pdf

[FB]

Has anyone looked at ERA Group common and compared to Bristow? Curious if you found Bristow more attractive, if so, why?

 

I found the Bristow "bonds" more attractive. I have looked at ERA - it is more levered and is less diversified, primarily in Gulf of Mexico. On the other hand, I think ERA Group's management is more sane than Bristow's. Having said that, ERA Group's bonds (7.75% 2022) are much more expensive (at 78) relative to Bristow's (55). Era's bonds are rated B- vs. Bristow's are rated B+. Both are on negative watch.

 

Attached Moody's report for Era's bonds.

Re leverage: if you include leases, Bristow is actually more levered than Era. Also one could argue that the gulf of Mexico is going to be more resilient to the oil correction than the North sea where Bristow is present so Era's lack of diversification is not necessarily a disadvantage.

[Phaceliacapital]

Thanks for the idea Rishi, I looked at the equity when this presentation came out: http://valuexvail.com/presentations/#!mg_ld_1057 but didn't feel comfortable as a lot of things had to go right.

 

Isn't their 339 term loan due in 2019?

 

Is ERA also moving into SAR? When I was looking at the company they noted this as one of their main drivers for the future (this was prior to the oil crash). Have they been accident free lately?

 

Pure out of interest, why do you hold on to the equity? (how large of a % is it for you?)

 

Thanks, I like the idea from the bond perspective and completely missed this (although the equity is on my watchlist).

[rishig]

Has anyone looked at ERA Group common and compared to Bristow? Curious if you found Bristow more attractive, if so, why?

 

I found the Bristow "bonds" more attractive. I have looked at ERA - it is more levered and is less diversified, primarily in Gulf of Mexico. On the other hand, I think ERA Group's management is more sane than Bristow's. Having said that, ERA Group's bonds (7.75% 2022) are much more expensive (at 78) relative to Bristow's (55). Era's bonds are rated B- vs. Bristow's are rated B+. Both are on negative watch.

 

Attached Moody's report for Era's bonds.

Re leverage: if you include leases, Bristow is actually more levered than Era. Also one could argue that the gulf of Mexico is going to be more resilient to the oil correction than the North sea where Bristow is present so Era's lack of diversification is not necessarily a disadvantage.

 

ERA's capital structure:

 

Secured:
Senior secured revolving credit facility	70
Unsecured:
7.75% Senior notes due 2022	175.1
Asset based lending:
Promissory notes	25.3
Other	0.1
Total	270.6

 

ERA's operations (TTM):

 

Operating Revenues:
Oil and gas	193.7
Other	88.9
Total operating revenues	282.6
Total operating costs	172.2
General and administrative	41.4
EBITDA	69.0
EBITDA Margin	24.4%

 

Debt / EBITDA: 3.9x

 

Future CapEx Commitments:

Unfunded capital commitments of $174.5m, of which $37.4m is payable during 2015 with balance payable through 2018. $127m may be cancelled with a damage fee of $3.2

 

If we add up $37.5m to net debt, that brings net debt to $307.5M and Debt / EBITDA to 4.5x. I expect when they report on Fri the net debt figure to have gone up.

 

Bristow's net debt (including leases) is $1860. TTM EBITDAR is $457. EV/EBITDAR is 4x. Having said that, ERA has a much higher interest rate coverage (due to lack of leases). Hence, its bonds are trading much higher than Bristow's.

 

However, if one were to look a bit further down, Bristow has about $60M of leases expiring (out of current $200M) in 2 years reducing Bristow's leverage and improving its interest rate coverage. Also, in 2016-2017, UK SAR will be fully operational and producing close to 100M in EBITDAR providing a good buffer in case oil and gas continues to weaken.

 

Also, Bristow has a large portion of its fleet in large helicopters vs. ERA has a large portion as medium. I think Bristow can get away from not doing capex vs. ERA may be forced to continue to do the capex to stay competitive.

 

In the end, the bonds for Bristow seem more compelling to me (at the current price).

 

[rishig]

Thanks for the idea Rishi, I looked at the equity when this presentation came out: http://valuexvail.com/presentations/#!mg_ld_1057 but didn't feel comfortable as a lot of things had to go right.

 

Isn't their 339 term loan due in 2019?

 

Is ERA also moving into SAR? When I was looking at the company they noted this as one of their main drivers for the future (this was prior to the oil crash). Have they been accident free lately?

 

Pure out of interest, why do you hold on to the equity? (how large of a % is it for you?)

 

Thanks, I like the idea from the bond perspective and completely missed this (although the equity is on my watchlist).

 

Why do I hold the equity? Well, I was too early (average cost is $24) but its a small position today (<3%). Also, it's not a given that the equity can't do well. Just the risks are much higher  and I am not willing to throw more money at the equity unless I see Bristow live within its cash flows.

[FB]

Has anyone looked at ERA Group common and compared to Bristow? Curious if you found Bristow more attractive, if so, why?

 

I found the Bristow "bonds" more attractive. I have looked at ERA - it is more levered and is less diversified, primarily in Gulf of Mexico. On the other hand, I think ERA Group's management is more sane than Bristow's. Having said that, ERA Group's bonds (7.75% 2022) are much more expensive (at 78) relative to Bristow's (55). Era's bonds are rated B- vs. Bristow's are rated B+. Both are on negative watch.

 

Attached Moody's report for Era's bonds.

Re leverage: if you include leases, Bristow is actually more levered than Era. Also one could argue that the gulf of Mexico is going to be more resilient to the oil correction than the North sea where Bristow is present so Era's lack of diversification is not necessarily a disadvantage.

 

ERA's capital structure:

 

Secured:
Senior secured revolving credit facility	70
Unsecured:
7.75% Senior notes due 2022	175.1
Asset based lending:
Promissory notes	25.3
Other	0.1
Total	270.6

 

ERA's operations (TTM):

 

Operating Revenues:
Oil and gas	193.7
Other	88.9
Total operating revenues	282.6
Total operating costs	172.2
General and administrative	41.4
EBITDA	69.0
EBITDA Margin	24.4%

 

Debt / EBITDA: 3.9x

 

Future CapEx Commitments:

Unfunded capital commitments of $174.5m, of which $37.4m is payable during 2015 with balance payable through 2018. $127m may be cancelled with a damage fee of $3.2

 

If we add up $37.5m to net debt, that brings net debt to $307.5M and Debt / EBITDA to 4.5x. I expect when they report on Fri the net debt figure to have gone up.

 

Bristow's net debt (including leases) is $1860. TTM EBITDAR is $457. EV/EBITDAR is 4x. Having said that, ERA has a much higher interest rate coverage (due to lack of leases). Hence, its bonds are trading much higher than Bristow's.

 

However, if one were to look a bit further down, Bristow has about $60M of leases expiring (out of current $200M) in 2 years reducing Bristow's leverage and improving its interest rate coverage. Also, in 2016-2017, UK SAR will be fully operational and producing close to 100M in EBITDAR providing a good buffer in case oil and gas continues to weaken.

 

Also, Bristow has a large portion of its fleet in large helicopters vs. ERA has a large portion as medium. I think Bristow can get away from not doing capex vs. ERA may be forced to continue to do the capex to stay competitive.

 

In the end, the bonds for Bristow seem more compelling to me (at the current price).

Bristow and Era are different animals from a capital structure perspective as almost half of Bristow’s fleet is leased where Era owns almost all its helicopters, so difficult to compare apples to apples here. The R in EBITDAR distorts a bit the debt/Ebitda® picture.

Btw I read somewhere that Bristow’s Debt/EBITDA (without the R) financial covenant were set at 4.75 stepping down later to 4.5, which suggests that creditors still look at Ebitda (to confirm). If that’s the case, then Bristow’s covenant situation may become uncomfortable. If I remember correctly, ERA’s debt / Ebitda covenant on its credit facility is set at 5. I might be wrong ; do you know the financial covenants for each by any chance?

One simpler way to look at leverage could be to look at Debt(incl Lease commitments) / Assets. On that metric I believe Era is much less leveraged ; also one could argue that the lease commitments understate the “economic leverage” of Bristow (600M commitment but exposure to 1.7bn worth of leased helicopters effectively, albeit for a shorter period)

 

 

[maybe4less]

 

 

Also, Bristow has a large portion of its fleet in large helicopters vs. ERA has a large portion as medium. I think Bristow can get away from not doing capex vs. ERA may be forced to continue to do the capex to stay competitive.

 

 

 

Having more mediums may not be such a liability. Large helicopters ("heavies") are pretty much only useful for servicing deepwater rigs. More than 60% of the global civilian fleet of mediums are not used in the O&G industry. If the downturn intensifies and Bristow, Era, or others need to sell significant parts of their fleets for cash, the value of the mediums is likely to hold up better in the secondary market.

[maybe4less]

Has anyone looked at ERA Group common and compared to Bristow? Curious if you found Bristow more attractive, if so, why?

 

I found the Bristow "bonds" more attractive. I have looked at ERA - it is more levered and is less diversified, primarily in Gulf of Mexico. On the other hand, I think ERA Group's management is more sane than Bristow's. Having said that, ERA Group's bonds (7.75% 2022) are much more expensive (at 78) relative to Bristow's (55). Era's bonds are rated B- vs. Bristow's are rated B+. Both are on negative watch.

 

Attached Moody's report for Era's bonds.

Re leverage: if you include leases, Bristow is actually more levered than Era. Also one could argue that the gulf of Mexico is going to be more resilient to the oil correction than the North sea where Bristow is present so Era's lack of diversification is not necessarily a disadvantage.

 

ERA's capital structure:

 

Secured:
Senior secured revolving credit facility	70
Unsecured:
7.75% Senior notes due 2022	175.1
Asset based lending:
Promissory notes	25.3
Other	0.1
Total	270.6

 

ERA's operations (TTM):

 

Operating Revenues:
Oil and gas	193.7
Other	88.9
Total operating revenues	282.6
Total operating costs	172.2
General and administrative	41.4
EBITDA	69.0
EBITDA Margin	24.4%

 

Debt / EBITDA: 3.9x

 

Future CapEx Commitments:

Unfunded capital commitments of $174.5m, of which $37.4m is payable during 2015 with balance payable through 2018. $127m may be cancelled with a damage fee of $3.2

 

If we add up $37.5m to net debt, that brings net debt to $307.5M and Debt / EBITDA to 4.5x. I expect when they report on Fri the net debt figure to have gone up.

 

Bristow's net debt (including leases) is $1860. TTM EBITDAR is $457. EV/EBITDAR is 4x. Having said that, ERA has a much higher interest rate coverage (due to lack of leases). Hence, its bonds are trading much higher than Bristow's.

 

However, if one were to look a bit further down, Bristow has about $60M of leases expiring (out of current $200M) in 2 years reducing Bristow's leverage and improving its interest rate coverage. Also, in 2016-2017, UK SAR will be fully operational and producing close to 100M in EBITDAR providing a good buffer in case oil and gas continues to weaken.

 

Also, Bristow has a large portion of its fleet in large helicopters vs. ERA has a large portion as medium. I think Bristow can get away from not doing capex vs. ERA may be forced to continue to do the capex to stay competitive.

 

In the end, the bonds for Bristow seem more compelling to me (at the current price).

Bristow and Era are different animals from a capital structure perspective as almost half of Bristow’s fleet is leased where Era owns almost all its helicopters, so difficult to compare apples to apples here. The R in EBITDAR distorts a bit the debt/Ebitda® picture.

Btw I read somewhere that Bristow’s Debt/EBITDA (without the R) financial covenant were set at 4.75 stepping down later to 4.5, which suggests that creditors still look at Ebitda (to confirm). If that’s the case, then Bristow’s covenant situation may become uncomfortable. If I remember correctly, ERA’s debt / Ebitda covenant on its credit facility is set at 5. I might be wrong ; do you know the financial covenants for each by any chance?

One simpler way to look at leverage could be to look at Debt(incl Lease commitments) / Assets. On that metric I believe Era is much less leveraged ; also one could argue that the lease commitments understate the “economic leverage” of Bristow (600M commitment but exposure to 1.7bn worth of leased helicopters effectively, albeit for a shorter period)

 

As of the end of September, Era and Bristow had about the same about of liquidity available to them in cash and revolver borrowing capacity, despite Bristow being a much larger company. In addition to the Debt/Asset ratio, this also suggests that Era's assets are less encumbered.

[rishig]

Has anyone looked at ERA Group common and compared to Bristow? Curious if you found Bristow more attractive, if so, why?

 

I found the Bristow "bonds" more attractive. I have looked at ERA - it is more levered and is less diversified, primarily in Gulf of Mexico. On the other hand, I think ERA Group's management is more sane than Bristow's. Having said that, ERA Group's bonds (7.75% 2022) are much more expensive (at 78) relative to Bristow's (55). Era's bonds are rated B- vs. Bristow's are rated B+. Both are on negative watch.

 

Attached Moody's report for Era's bonds.

Re leverage: if you include leases, Bristow is actually more levered than Era. Also one could argue that the gulf of Mexico is going to be more resilient to the oil correction than the North sea where Bristow is present so Era's lack of diversification is not necessarily a disadvantage.

 

ERA's capital structure:

 

Secured:
Senior secured revolving credit facility	70
Unsecured:
7.75% Senior notes due 2022	175.1
Asset based lending:
Promissory notes	25.3
Other	0.1
Total	270.6

 

ERA's operations (TTM):

 

Operating Revenues:
Oil and gas	193.7
Other	88.9
Total operating revenues	282.6
Total operating costs	172.2
General and administrative	41.4
EBITDA	69.0
EBITDA Margin	24.4%

 

Debt / EBITDA: 3.9x

 

Future CapEx Commitments:

Unfunded capital commitments of $174.5m, of which $37.4m is payable during 2015 with balance payable through 2018. $127m may be cancelled with a damage fee of $3.2

 

If we add up $37.5m to net debt, that brings net debt to $307.5M and Debt / EBITDA to 4.5x. I expect when they report on Fri the net debt figure to have gone up.

 

Bristow's net debt (including leases) is $1860. TTM EBITDAR is $457. EV/EBITDAR is 4x. Having said that, ERA has a much higher interest rate coverage (due to lack of leases). Hence, its bonds are trading much higher than Bristow's.

 

However, if one were to look a bit further down, Bristow has about $60M of leases expiring (out of current $200M) in 2 years reducing Bristow's leverage and improving its interest rate coverage. Also, in 2016-2017, UK SAR will be fully operational and producing close to 100M in EBITDAR providing a good buffer in case oil and gas continues to weaken.

 

Also, Bristow has a large portion of its fleet in large helicopters vs. ERA has a large portion as medium. I think Bristow can get away from not doing capex vs. ERA may be forced to continue to do the capex to stay competitive.

 

In the end, the bonds for Bristow seem more compelling to me (at the current price).

Bristow and Era are different animals from a capital structure perspective as almost half of Bristow’s fleet is leased where Era owns almost all its helicopters, so difficult to compare apples to apples here. The R in EBITDAR distorts a bit the debt/Ebitda® picture.

Btw I read somewhere that Bristow’s Debt/EBITDA (without the R) financial covenant were set at 4.75 stepping down later to 4.5, which suggests that creditors still look at Ebitda (to confirm). If that’s the case, then Bristow’s covenant situation may become uncomfortable. If I remember correctly, ERA’s debt / Ebitda covenant on its credit facility is set at 5. I might be wrong ; do you know the financial covenants for each by any chance?

One simpler way to look at leverage could be to look at Debt(incl Lease commitments) / Assets. On that metric I believe Era is much less leveraged ; also one could argue that the lease commitments understate the “economic leverage” of Bristow (600M commitment but exposure to 1.7bn worth of leased helicopters effectively, albeit for a shorter period)

 

As of the end of September, Era and Bristow had about the same about of liquidity available to them in cash and revolver borrowing capacity, despite Bristow being a much larger company. In addition to the Debt/Asset ratio, this also suggests that Era's assets are less encumbered.

 

(1) As a purchaser of Bristow's notes, I am not trying to minimize the chances of a credit risk. As of today, they are trading at 56.

(2) The face value of net debt excluding leases is $1.2B. Including leases, pension and other, net debt is $1.8B

(3) The market value of net debt excluding leases if $1.0B. Including leases, pension and other, net debt is $1.6B

(4) EBITDAR in TTM is $450M

(5) Financial covenants are based on two metrics: Net debt / EBITDAR and interest rate coverage. Net debt / EBITDAR is 4.0x and interest rate coverage is 2.0x

(6) The covenant thresholds are 4.75x and 2.0x. So, they have barely any room on interest rate coverage. Do I know that they won't violate the covenants? No, but will the secured put it in bk for a technical violation? Possible but likely no.

(7) What happens if they do? What are the fixed expenses to cut? It's the leases. A large portion of leases are expiring in two years, but it could be accelerated in ch. 11. In fact, I would think if they get to this situation they would negotiate with their biggest leasor (GE) to get them relief on some of the leases. In fact, I doubt they will need ch. 11. to get some relief. Their relationship with the leasor is one of partnership, unlike the bond holders. GE's helicopter leasing company (Milestone Aviation) has been the biggest leasor for Bristow and Bristow has been their largest lessee. GE has a solid balance sheet, so I doubt that they will be distress because of Bristow.

(8 ) What if that doesn't happen and it goes through Ch. 11.? By buying the bonds at 55, you are purchasing at 3.5x EV/EBITDAR, the senior unsecured are certain to be the fulcrum security for a business that has large asset base of $1.4B (net of senior debt and leases) for unsecured debt of $200 at market value.

 

So, now question is why are we comparing this to ERA bonds that are trading at close 78. I see multiple times the same question is being asked - is ERA safer? Yes, but I wouldn't be buying the bonds given they are at 78. Give me ERA bonds at 55 and I would buy them. Can someone convince me why ERA bonds at 78 are a better buy than Bristow's at 55? I am open to being convinced.

[FB]

Has anyone looked at ERA Group common and compared to Bristow? Curious if you found Bristow more attractive, if so, why?

 

I found the Bristow "bonds" more attractive. I have looked at ERA - it is more levered and is less diversified, primarily in Gulf of Mexico. On the other hand, I think ERA Group's management is more sane than Bristow's. Having said that, ERA Group's bonds (7.75% 2022) are much more expensive (at 78) relative to Bristow's (55). Era's bonds are rated B- vs. Bristow's are rated B+. Both are on negative watch.

 

Attached Moody's report for Era's bonds.

Re leverage: if you include leases, Bristow is actually more levered than Era. Also one could argue that the gulf of Mexico is going to be more resilient to the oil correction than the North sea where Bristow is present so Era's lack of diversification is not necessarily a disadvantage.

 

ERA's capital structure:

 

Secured:
Senior secured revolving credit facility	70
Unsecured:
7.75% Senior notes due 2022	175.1
Asset based lending:
Promissory notes	25.3
Other	0.1
Total	270.6

 

ERA's operations (TTM):

 

Operating Revenues:
Oil and gas	193.7
Other	88.9
Total operating revenues	282.6
Total operating costs	172.2
General and administrative	41.4
EBITDA	69.0
EBITDA Margin	24.4%

 

Debt / EBITDA: 3.9x

 

Future CapEx Commitments:

Unfunded capital commitments of $174.5m, of which $37.4m is payable during 2015 with balance payable through 2018. $127m may be cancelled with a damage fee of $3.2

 

If we add up $37.5m to net debt, that brings net debt to $307.5M and Debt / EBITDA to 4.5x. I expect when they report on Fri the net debt figure to have gone up.

 

Bristow's net debt (including leases) is $1860. TTM EBITDAR is $457. EV/EBITDAR is 4x. Having said that, ERA has a much higher interest rate coverage (due to lack of leases). Hence, its bonds are trading much higher than Bristow's.

 

However, if one were to look a bit further down, Bristow has about $60M of leases expiring (out of current $200M) in 2 years reducing Bristow's leverage and improving its interest rate coverage. Also, in 2016-2017, UK SAR will be fully operational and producing close to 100M in EBITDAR providing a good buffer in case oil and gas continues to weaken.

 

Also, Bristow has a large portion of its fleet in large helicopters vs. ERA has a large portion as medium. I think Bristow can get away from not doing capex vs. ERA may be forced to continue to do the capex to stay competitive.

 

In the end, the bonds for Bristow seem more compelling to me (at the current price).

Bristow and Era are different animals from a capital structure perspective as almost half of Bristow’s fleet is leased where Era owns almost all its helicopters, so difficult to compare apples to apples here. The R in EBITDAR distorts a bit the debt/Ebitda® picture.

Btw I read somewhere that Bristow’s Debt/EBITDA (without the R) financial covenant were set at 4.75 stepping down later to 4.5, which suggests that creditors still look at Ebitda (to confirm). If that’s the case, then Bristow’s covenant situation may become uncomfortable. If I remember correctly, ERA’s debt / Ebitda covenant on its credit facility is set at 5. I might be wrong ; do you know the financial covenants for each by any chance?

One simpler way to look at leverage could be to look at Debt(incl Lease commitments) / Assets. On that metric I believe Era is much less leveraged ; also one could argue that the lease commitments understate the “economic leverage” of Bristow (600M commitment but exposure to 1.7bn worth of leased helicopters effectively, albeit for a shorter period)

 

As of the end of September, Era and Bristow had about the same about of liquidity available to them in cash and revolver borrowing capacity, despite Bristow being a much larger company. In addition to the Debt/Asset ratio, this also suggests that Era's assets are less encumbered.

 

(1) As a purchaser of Bristow's notes, I am not trying to minimize the chances of a credit risk. As of today, they are trading at 56.

(2) The face value of net debt excluding leases is $1.2B. Including leases, pension and other, net debt is $1.8B

(3) The market value of net debt excluding leases if $1.0B. Including leases, pension and other, net debt is $1.6B

(4) EBITDAR in TTM is $450M

(5) Financial covenants are based on two metrics: Net debt / EBITDAR and interest rate coverage. Net debt / EBITDAR is 4.0x and interest rate coverage is 2.0x

(6) The covenant thresholds are 4.75x and 2.0x. So, they have barely any room on interest rate coverage. Do I know that they won't violate the covenants? No, but will the secured put it in bk for a technical violation? Possible but likely no.

(7) What happens if they do? What are the fixed expenses to cut? It's the leases. A large portion of leases are expiring in two years, but it could be accelerated in ch. 11. In fact, I would think if they get to this situation they would negotiate with their biggest leasor (GE) to get them relief on some of the leases. In fact, I doubt they will need ch. 11. to get some relief. Their relationship with the leasor is one of partnership, unlike the bond holders. GE's helicopter leasing company (Milestone Aviation) has been the biggest leasor for Bristow and Bristow has been their largest lessee. GE has a solid balance sheet, so I doubt that they will be distress because of Bristow.

(8 ) What if that doesn't happen and it goes through Ch. 11.? By buying the bonds at 55, you are purchasing at 3.5x EV/EBITDAR, the senior unsecured are certain to be the fulcrum security for a business that has large asset base of $1.4B (net of senior debt and leases) for unsecured debt of $200 at market value.

 

So, now question is why are we comparing this to ERA bonds that are trading at close 78. I see multiple times the same question is being asked - is ERA safer? Yes, but I wouldn't be buying the bonds given they are at 78. Give me ERA bonds at 55 and I would buy them. Can someone convince me why ERA bonds at 78 are a better buy than Bristow's at 55? I am open to being convinced.

 

To be clear I am not suggesting Era’s bonds are necessarily more attractive than BRS’s from a risk/reward standpoint ( in fact if i were in the market to buy bonds right now, I would probably go for BRS ). The Helicopter market seems to be under a lot of stress: it’s an interesting space to watch and a good exercise to look at the various options available. By the way, have you looked at CHC bonds?

[rishig]

Has anyone looked at ERA Group common and compared to Bristow? Curious if you found Bristow more attractive, if so, why?

 

I found the Bristow "bonds" more attractive. I have looked at ERA - it is more levered and is less diversified, primarily in Gulf of Mexico. On the other hand, I think ERA Group's management is more sane than Bristow's. Having said that, ERA Group's bonds (7.75% 2022) are much more expensive (at 78) relative to Bristow's (55). Era's bonds are rated B- vs. Bristow's are rated B+. Both are on negative watch.

 

Attached Moody's report for Era's bonds.

Re leverage: if you include leases, Bristow is actually more levered than Era. Also one could argue that the gulf of Mexico is going to be more resilient to the oil correction than the North sea where Bristow is present so Era's lack of diversification is not necessarily a disadvantage.

 

ERA's capital structure:

 

Secured:
Senior secured revolving credit facility	70
Unsecured:
7.75% Senior notes due 2022	175.1
Asset based lending:
Promissory notes	25.3
Other	0.1
Total	270.6

 

ERA's operations (TTM):

 

Operating Revenues:
Oil and gas	193.7
Other	88.9
Total operating revenues	282.6
Total operating costs	172.2
General and administrative	41.4
EBITDA	69.0
EBITDA Margin	24.4%

 

Debt / EBITDA: 3.9x

 

Future CapEx Commitments:

Unfunded capital commitments of $174.5m, of which $37.4m is payable during 2015 with balance payable through 2018. $127m may be cancelled with a damage fee of $3.2

 

If we add up $37.5m to net debt, that brings net debt to $307.5M and Debt / EBITDA to 4.5x. I expect when they report on Fri the net debt figure to have gone up.

 

Bristow's net debt (including leases) is $1860. TTM EBITDAR is $457. EV/EBITDAR is 4x. Having said that, ERA has a much higher interest rate coverage (due to lack of leases). Hence, its bonds are trading much higher than Bristow's.

 

However, if one were to look a bit further down, Bristow has about $60M of leases expiring (out of current $200M) in 2 years reducing Bristow's leverage and improving its interest rate coverage. Also, in 2016-2017, UK SAR will be fully operational and producing close to 100M in EBITDAR providing a good buffer in case oil and gas continues to weaken.

 

Also, Bristow has a large portion of its fleet in large helicopters vs. ERA has a large portion as medium. I think Bristow can get away from not doing capex vs. ERA may be forced to continue to do the capex to stay competitive.

 

In the end, the bonds for Bristow seem more compelling to me (at the current price).

Bristow and Era are different animals from a capital structure perspective as almost half of Bristow’s fleet is leased where Era owns almost all its helicopters, so difficult to compare apples to apples here. The R in EBITDAR distorts a bit the debt/Ebitda® picture.

Btw I read somewhere that Bristow’s Debt/EBITDA (without the R) financial covenant were set at 4.75 stepping down later to 4.5, which suggests that creditors still look at Ebitda (to confirm). If that’s the case, then Bristow’s covenant situation may become uncomfortable. If I remember correctly, ERA’s debt / Ebitda covenant on its credit facility is set at 5. I might be wrong ; do you know the financial covenants for each by any chance?

One simpler way to look at leverage could be to look at Debt(incl Lease commitments) / Assets. On that metric I believe Era is much less leveraged ; also one could argue that the lease commitments understate the “economic leverage” of Bristow (600M commitment but exposure to 1.7bn worth of leased helicopters effectively, albeit for a shorter period)

 

As of the end of September, Era and Bristow had about the same about of liquidity available to them in cash and revolver borrowing capacity, despite Bristow being a much larger company. In addition to the Debt/Asset ratio, this also suggests that Era's assets are less encumbered.

 

(1) As a purchaser of Bristow's notes, I am not trying to minimize the chances of a credit risk. As of today, they are trading at 56.

(2) The face value of net debt excluding leases is $1.2B. Including leases, pension and other, net debt is $1.8B

(3) The market value of net debt excluding leases if $1.0B. Including leases, pension and other, net debt is $1.6B

(4) EBITDAR in TTM is $450M

(5) Financial covenants are based on two metrics: Net debt / EBITDAR and interest rate coverage. Net debt / EBITDAR is 4.0x and interest rate coverage is 2.0x

(6) The covenant thresholds are 4.75x and 2.0x. So, they have barely any room on interest rate coverage. Do I know that they won't violate the covenants? No, but will the secured put it in bk for a technical violation? Possible but likely no.

(7) What happens if they do? What are the fixed expenses to cut? It's the leases. A large portion of leases are expiring in two years, but it could be accelerated in ch. 11. In fact, I would think if they get to this situation they would negotiate with their biggest leasor (GE) to get them relief on some of the leases. In fact, I doubt they will need ch. 11. to get some relief. Their relationship with the leasor is one of partnership, unlike the bond holders. GE's helicopter leasing company (Milestone Aviation) has been the biggest leasor for Bristow and Bristow has been their largest lessee. GE has a solid balance sheet, so I doubt that they will be distress because of Bristow.

(8 ) What if that doesn't happen and it goes through Ch. 11.? By buying the bonds at 55, you are purchasing at 3.5x EV/EBITDAR, the senior unsecured are certain to be the fulcrum security for a business that has large asset base of $1.4B (net of senior debt and leases) for unsecured debt of $200 at market value.

 

So, now question is why are we comparing this to ERA bonds that are trading at close 78. I see multiple times the same question is being asked - is ERA safer? Yes, but I wouldn't be buying the bonds given they are at 78. Give me ERA bonds at 55 and I would buy them. Can someone convince me why ERA bonds at 78 are a better buy than Bristow's at 55? I am open to being convinced.

 

To be clear I am not suggesting Era’s bonds are necessarily more attractive than BRS’s from a risk/reward standpoint ( in fact if i were in the market to buy bonds right now, I would probably go for BRS ). The Helicopter market seems to be under a lot of stress: it’s an interesting space to watch and a good exercise to look at the various options available. By the way, have you looked at CHC bonds?

 

From peak to trough, Bristow's revenues have fallen from $1850B to $1680 (at latest Q run-rate). EBITDAR has fallen from $470 to $459. What has happened is that lease expenses have gone up (due to leases for UK SAR) and UK SAR has not gone fully operational yet (as expected). The LACE (large aircraft carrier equivalent) rate has gone from peak of $9.55M to $8.89M. I don't see that the business is in as much distress as other oil and gas servicing companies. They provide an essential service and most of the revenue comes from a standing charge.

 

I have looked at CHC bonds, but they seem a lot riskier from balance sheet point of view.

[odin]

First time poster here. 

 

"Can someone convince me why ERA bonds at 78 are a better buy than Bristow's at 55? I am open to being convinced."

 

I won't try to convince you, but hopefully I can add to the discussion.

 

I think Era has a better chance than Bristow of operating as a going concern for the foreseeable future for several reasons:

 

1) As someone previously pointed out, the fact that Era's fleet is skewed toward medium and light aircraft is actually a positive, in my opinion.  These units are actually changing hands on the secondary market (I have verified with industry contacts) as they have many alternative uses, unlike large aircraft that are primarily used in oil and gas transportation.  Given Era's small size, the sale of only a few aircraft would generate significant liquidity.  The firm could nearly pay all of its interest expense for a year with proceeds from the sale of one AW-139 (which make up about half of Era's fleet value by my estimates).  AW-139 values have actually held up well throughout the downturn.

 

2) While I agree Bristow is in better shape operationally with the UK SAR contract ramping up, Era is managing somewhat respectably even with a significant overhang of idle aircraft.  Era could probably part with 25% of its aircraft and still maintain its current level operations (although "current" is quickly declining).  I'm not sure BRS could do the same.

 

3) Era has manageable aircraft commitments, with only about $50 million in total commitments to be met in Q4 and 2016.  There is revolver availability to meet these commitments.  Bristow on the other hand might have difficulty meeting its purchase requirements.  Everything in high-yield that is remotely related to oil and gas is trading on liquidity right now.  There is probably a fear of being primed by a second lien. 

 

My last point is a bit unrelated, but I think the fleet valuations Bristow used to include in its slide decks were complete BS.  The values of many aircraft models have come down significantly over the last few quarters as well. 

 

That being said, I agree there could be considerable values in the BRS notes at 55 if one is willing to hold through a restructuring.  In the high-60s I wasn't very interested, but I hadn't seen the trades of the last couple weeks.  Further investigation seems warranted. 

[rishig]

First time poster here. 

 

"Can someone convince me why ERA bonds at 78 are a better buy than Bristow's at 55? I am open to being convinced."

 

I won't try to convince you, but hopefully I can add to the discussion.

 

I think Era has a better chance than Bristow of operating as a going concern for the foreseeable future for several reasons:

 

1) As someone previously pointed out, the fact that Era's fleet is skewed toward medium and light aircraft is actually a positive, in my opinion.  These units are actually changing hands on the secondary market (I have verified with industry contacts) as they have many alternative uses, unlike large aircraft that are primarily used in oil and gas transportation.  Given Era's small size, the sale of only a few aircraft would generate significant liquidity.  The firm could nearly pay all of its interest expense for a year with proceeds from the sale of one AW-139 (which make up about half of Era's fleet value by my estimates).  AW-139 values have actually held up well throughout the downturn.

 

2) While I agree Bristow is in better shape operationally with the UK SAR contract ramping up, Era is managing somewhat respectably even with a significant overhang of idle aircraft.  Era could probably part with 25% of its aircraft and still maintain its current level operations (although "current" is quickly declining).  I'm not sure BRS could do the same.

 

3) Era has manageable aircraft commitments, with only about $50 million in total commitments to be met in Q4 and 2016.  There is revolver availability to meet these commitments.  Bristow on the other hand might have difficulty meeting its purchase requirements.  Everything in high-yield that is remotely related to oil and gas is trading on liquidity right now.  There is probably a fear of being primed by a second lien. 

 

My last point is a bit unrelated, but I think the fleet valuations Bristow used to include in its slide decks were complete BS.  The values of many aircraft models have come down significantly over the last few quarters as well. 

 

That being said, I agree there could be considerable values in the BRS notes at 55 if one is willing to hold through a restructuring.  In the high-60s I wasn't very interested, but I hadn't seen the trades of the last couple weeks.  Further investigation seems warranted.

 

I don't think Bristow will not be an going concern, post restructuring if needed.

 

1) Bristow owns 60 large, 70 medium, and 37 small helicopters. This excludes any helicopters in unconsolidated affiliates or in the training segment. The same argument that applies to Era's medium and small applies to Bristow.

 

2) Same applies to Bristow. About 25% of their leases will be expiring in 2 years, and if business has not recovered, they can let those helicopters go.

 

3) Bristow has liquidity of $300M and expects capex to be in $120M range (annually) for the next 2 years. They have deferred much of the capex. As long as they can maintain EBITDAR margin in the 25%-30%, unlikely they run into major liquidity issues. I agree that Era is in better shape, but the notes at 78 reflects that.

 

4) Yup, agree. Those values are bogus. But I don't think you need to rely on those values. If one starts with GAAP depreciated book values (which is conservative in my opinion), you have enough assets to protect the unsecured notes in a restructuring.

 

5) I wouldn't be talking about these at 78. Price is a big reason why we are looking at it.

[odin]

Rishig - how are you thinking about the lease rejection claims in BK?  I realize your worst case scenario is draconian as you said, and Ch11 is unlikely at this point, but still curious.  Thx

 

 

[rishig]

Rishig - how are you thinking about the lease rejection claims in BK?  I realize your worst case scenario is draconian as you said, and Ch11 is unlikely at this point, but still curious.  Thx

 

Cumulative lease expiration timeline:

Mar 16 - Mar 17:  $2M

Mar 17 - Mar 18: $20M

Mar 18 - Mar 19: $45M

Mar 19 - Mar 20: $76M

 

In Ch. 11, these lease expirations (accounting for ~45% of current lease expense) could be accelerated.

[rishig]

Bristow presentation at 2016 Credit Suisse Energy Summit:

http://ir.bristowgroup.com/phoenix.zhtml?c=91226&p=irol-EventDetails&EventId=5218847

[Guest neiljgsingh]

The common has been on a gorgeous 30% run over the past month but is still down by the same amount YTD. How have the unsecured fared? And any different views on the risk/reward from the common? I realize the covenant situation is still not great.

[rishig]

The common has been on a gorgeous 30% run over the past month but is still down by the same amount YTD. How have the unsecured fared? And any different views on the risk/reward from the common? I realize the covenant situation is still not great.

 

These are two different markets, and it seems that the two participants don't talk to each other. Here is an extreme example:

http://brontecapital.blogspot.com/2016/03/being-punished-for-doing-obvious.html

 

I learnt a few more things after my initial posting:

- Not all of their senior term loans are due in Nov 2017. About $250M is due and the rest is staggered over time.

- A large portion of their assets are unencumbered. Not all the owned helicopters are pledged towards senior debt.

 

I still hold the common, but at 50-60 the unsecured notes are a better risk/reward in the long-term. Here is a slightly longer version of everything I know about Bristow:

https://docs.google.com/presentation/d/10Dv_qKX117Xyfdo_yAlvNY_eKD8D6z6Yis5Z05uN3V4/edit

[sternalot]

John Rogers of Ariel Investments on BRS: "Take helicopter-services company Bristow (BRS, 20), which fell 60% in 2015. Bristow’s main business is transporting oil workers to offshore rigs. Given the oil and gas connection, some investors are quick to hit the sell button when oil prices fall. And yet most of the company’s operating income comes from a monthly “standing” charge–whereby helicopters must be at the ready in the event of trouble. Besides, at its current stock price, the company’s helicopter fleet is worth more than the value of the whole company. The shares have a forward P/E ratio of just eight."

 

http://www.forbes.com/sites/investor/2016/01/20/doubling-down-on-industrials/#7117f9b3502f

 

 

I'm not sure this is right.

 

I used Bristow's disclosures on their helicopter fleet and compared it to asking prices on helicopters in the pre-owned market. My conclusion was that the helicopters are worth $1.2bn and their helicopters held under JV are worth $450m (not adjusted for BRS share), considerably less than the $2.3bn on the balance sheet.

 

[rishig]

John Rogers of Ariel Investments on BRS: "Take helicopter-services company Bristow (BRS, 20), which fell 60% in 2015. Bristow’s main business is transporting oil workers to offshore rigs. Given the oil and gas connection, some investors are quick to hit the sell button when oil prices fall. And yet most of the company’s operating income comes from a monthly “standing” charge–whereby helicopters must be at the ready in the event of trouble. Besides, at its current stock price, the company’s helicopter fleet is worth more than the value of the whole company. The shares have a forward P/E ratio of just eight."

 

http://www.forbes.com/sites/investor/2016/01/20/doubling-down-on-industrials/#7117f9b3502f

 

 

I'm not sure this is right.

 

I used Bristow's disclosures on their helicopter fleet and compared it to asking prices on helicopters in the pre-owned market. My conclusion was that the helicopters are worth $1.2bn and their helicopters held under JV are worth $450m (not adjusted for BRS share), considerably less than the $2.3bn on the balance sheet.

 

I did a back of the envelope myself and have a valuation for the owned fleet at $1.0B - $1.6B, not including the JV. See page 35 on my presentation.

https://docs.google.com/presentation/d/10Dv_qKX117Xyfdo_yAlvNY_eKD8D6z6Yis5Z05uN3V4/edit#slide=id.g11b1646df2_4_286