AIM.TO - Aimia

[wabuffo]

wabuff - when you said, "good luck to the longs" does that mean you are no longer one of the longs?

 

I have a tiny position just to force me to keep looking at it. 

 

With a billion dollar DIP it seems like liquidation for aeromexico is off the table.

 

Have you looked at the term sheet and Aeromexico's monthly cash flow budget that is part of the filing?  I would not be so sanguine.

 

BTW - Aeromexico's 51% ownership in PLM is pledged to the DIP lenders.  I thought the Mittleman's assured us that it was pledged to AIMIA for the intercompany loan?  Something tells me the DIP lenders come first.  LOL

 

They couldn't even get a bank to be DIP lender.  Its Apollo (one of Aeromexico's prepetition creditors) - and they are charging LIBOR/ABR +6-8% for the first $200m and LIBOR/ABR + 11-16% for the second $800m (!!).  What? Vinnie the loan shark wasn't taking Aeromexico's calls?  LOL.

 

wabuffo

[Homestead31]

I know you do great work and get into the weeds, but i also know you have a tendency to always see everything in the most negative light possible.  are you sure that you are not letting that negative light color your reading of the document?

 

The text says, "EXCESS VALUE (emphasis mine) in pledged 51% equity stake in PLM" 

 

my reading of that is that Aeromexico has pledged  their stake in PLM net of what they owe to PLM as DIP collateral.

 

the text also says, "Prior approval of PLM's Shareholders Meeting is required"

 

I fully admit i am not a BK attorney, but this doesn't seem as dire as what you are LOLing at.

 

[wabuffo]

I'm still going through the document.  It looks like Apollo has the option of converting Tranche 2 ($800m) into equity.  I guess that helps increase the odds of survival if Apollo judges it wants to own equity rather than the super-secured position in the capital structure based on the plan of reorganization waterfall.

 

Bill

[Homestead31]

yes re: Apollo and equity.

 

do you agree with my reading of "excess value" meaning that Aeromexico's stake in PLM is pledged as collateral only net of what is owed to PLM?

 

 

because it seems to me that the chances of Aeromexico avoiding liquidation have gone up considerably, and it seems to me that based on the "excess value" PLM's outstanding loan to Aeromexico is well protected, which when taken together suggests that Aimia stock should trade meaningfully higher.

[wabuffo]

do you agree with my reading of "excess value" meaning that Aeromexico's stake in PLM is pledged as collateral only net of what is owed to PLM?

 

Hard to know.  I don't think it really matters.  As I've pointed out before, Aeromexico can't really default on what it owes to PLM unless it liquidates and doesn't deliver the pledged reward seats.  Even the cash loan has the option of being repaid with more free seats instead of cash.  The loan portion (and not the seat advance) was the only portion 'collateralized' according to the Aeromexico's CFO's Ch. 11 testimony. 

 

PLM is bankruptcy-remote, but Aeromexico's 51% ownership is an asset of the debtor's estate that is now formally part of the collateral package for the DIP loan.  If this Chapter 11 drags on, Aeromexico will pay off the entire $100m in free seats (assuming the Court allows it to honor its business relationship with PLM, which I'm sure it will).

 

because it seems to me that the chances of Aeromexico avoiding liquidation have gone up considerably

 

Probably, but bankruptcies are notoriously hard to predict.  Aeromexico's cash flow statement is worrisome.  It's interesting to note that they were two months from going completely titsup (October).  I'm sure they are being very conservative in their projections but their budget shows that they are still not consistently cash flow positive from operations even going into 2022.  And that's before the $200m DIP loan/fees/interest plus all the Ch. 11 costs.  Apollo's position implies a cram-down is coming and I think there is going to be a fight with the other creditors.  There's a chance that this could get contentious if Apollo tries to use its whip hand as both a super-senior secured lender and potential equity class.  (unless the other creditors get 100% recovery -- which seems doubtful - but I haven't looked closely).

 

Might be interesting to take a stab at a waterfall recovery spreadsheet using the cash flow projection and cash balance at the end of 2021 and layering in the monetizable assets (not much - cash, some owned planes, a Mexico City HQ building, credit card excess receivables, and of course, 51% of PLM) vs the DIP Loan and all of the debt, plus prepetition liabilities plus claims.

 

It will be interesting to see how they put together a viable Plan of Reorganization in this terrible environment for the aviation industry.  It sure will be fascinating to watch.

 

wabuffo

[Pref User]

Homestead I am thinking about your comment about Wabuffo always negative and I am trying to picture the best outcome.

 

The best outcome, Coronavirus solved and Aeromexico has an unbelievable year in 2021 producing record cash flow allowing them to repay off DIP with internal cash flow. We'll say $400M of the loan is repaid and $600M converted to equity. Now for Apollo to only be 49% of control in this situation the stock needs to re-rate and trade at a 6.2 times EBITDA multiple, which is 1 turn higher than pre coronavirus valuation. In this situation, PLM survives and there is no worry about it, but now it becomes do you think Mittleman will be able to out-negotiate Apollo on a transaction? Not sure of the answer but something to consider.

 

Next best, there is somewhat recovery and Aeromexico can pay off some of the debt, but to make Apollo whole and to not be a complete liquidation they will have to sell assets. The question then becomes is PLM impaired because there are fewer flights, fewer routes, whatever might be the reproductions of an asset sale. Effecting the value of PLM. Then the next issue becomes how will Aeromexico ever pay that $400M price tag over the next 7 years? Maybe they don't and PLM is just a cash flow stream, but if the value of the loyalty program is impaired from the assets sales is the dividend stream the same as it currently is? Can they refiance at the multiple that they previously discussed?

 

I am building a decision tree and trying to understand outcomes right now. I would like to include all possible outcomes, if you see more psotives ones please post. Thank you.

[Homestead31]

i am trying to rewind this a bit

 

on page 5 of the collateral sheet where PLM is listed, there are 2 items i'd like to focus on. 

 

First, it says "Mexican non-possessory pledge (specific) over beneficiary rights (derechos fideicomisarios)" emphasis mine

 

 

As I understand it, under a non-possessory pledge: "The pledgor creates a security interest over tangible moveable property (or generically described unidentified property), but unlike the commercial pledge, the pledgor maintains possession of the pledged assets and can use and sell those assets in the ordinary course of business, subject to certain rules."  emphasis mine

 

 

Second, it says "Prior approval of PLM’s Shareholders Meeting is required."  which seems to be self explanatory.

 

 

Of the three parties involved here (AeroMexico, Aimia, and Apollo) it seems likely that AeroMexico has the weakest hand and Apollo has the strongest hand, but it seems like Aimia has a fair amount of negotiating leverage too.  For Apollo to be at the table, it seems likely that they must be comfortable with the idea that they will wind up as equity holders of AeroMexico.  I think everyone would agree that airline loyalty is a much better business than the business of actually flying planes - which means that Apollo has to find a way to work with Aimia here. 

 

It is impossible to know how this will work out and it will be quite a game of chicken, but on one extreme, the way I am reading the doc Aimia could wind up trying to buy out AeroMexico's stake in PLM.  This of course would risk having Apollo abandon the DIP, so i think it is unlikely that this hard of a line is drawn, but it is not unreasonable to expect that Aimia could win some sort of concessions in exchange for agreeing to allow AeroMexico to pledge the excess value of PLM as collateral.

 

Pref User - as for your question about "out-negotiating Apollo" i think the above applies and gives more leverage to Mittleman/Aimia than might be immediately apparent.  As for your commentary around the re-rating of AeroMexico's multiple, take a look at a chart of Air Canada from late 2018 when the deal for Aeroplan was announced.  The stock re-rated significantly over the next few quarters, because again, loyalty is a better business than flying planes.  I think if not for COVID, AeroMexico would have re-rated higher on the news that they had firmly established a path toward full ownership of PLM, although likely not as aggressively as Air Canada given the longer time line.

 

However, looking at the Air Canada experience surely inform's Apollo's view here, and I would note that with $300B+ in AUM, Apollo could find the $400M guaranteed payment to Aimia for its half of PLM in the couch cushions.  It is thus not impossible to imagine that Apollo will wind up as the equity owner of AeroMexico and then buyout Aimia's PLM stake on an accelerated time line, which would be hugely positive for Aimia stock.

 

I realize all of this is rather rosy and an angel's advocate view - but as the most negative scenarios are always front and center thanks to wabuff (and full credit to the quality of wabuff's work) - so i think it is worth remembering that there are a wide range of possible outcomes here, Aimia is not just a silent observer, and PLM remains the prize in anything associated with Aeromexico.

 

 

[wabuffo]

Homestead31 - let's declare "peace with honor" on the PLM collateral question.  My view is that AIMIA doesn't really need collateral because Aeromexico can't/won't default and AIMIA's ownership rights are protected here.

 

Let's move on to the more interesting questions you and Pref User are asking related to scenarios for how Aeromexico's Chapter 11 case will turn out.  Also interesting to watch will be how Apollo's motivations/strategies will play out.  I think it is very important to dimensionalize the likely net asset position of Aeromexico at the end of 2021 when they could be filing their Plan of Reorganization (POR) and disclosure statement for exiting bankruptcy.  I will say upfront I'm not a bankruptcy legal expert (but I did stay at a Holiday Inn Express last night!)

 

https://www.youtube.com/watch?v=8dOHEw8izno

 

There is a lot we don't know right now - but that shouldn't stop us from trying to put numbers around what it could look like and apply a bit of game theory to it.  My spreadsheet is guaranteed to be wrong (but I promise to update it as we go through the Court Proceedings).  I'm hoping it could be helpful for visualization purposes and aiding our discussion.  Here it is (click on the link to go full screen).  I will also attach my excel file for you guys to play with - please be savage with it.  I welcome feedback and especially corrections.

 

 

Assumptions:

1) I used the cash flow budget from the DIP filing.  I added the DIP financing plus interest expenses (there are fees as well but I'm ignoring them for now).

2) I took 10x last five years EBIT (pre-Covid) as an aggressively optimistic value for Aeromexico's airline business.

3) I used $1B for PLM value and swagged from my butt the numbers for their other assets (HQ building, credit card excess receivables as other assets).

4) I don't have prepetition liability and claims detail as yet from the Chapter 11 court docket, so I used their Q2 balance sheet for debt/leases and and non-debt current liabilities as prepetition unsecured claims.

 

I don't have much to say about the quickie balance sheet summary in the bottom right hand corner - other than to say, making Apollo's DIP money-good in terms of equity value is going to be very hard (assuming my numbers are right - which, they're not).  Even if you assume that some of the secured lenders will have to accept new debt in the post-reorg Aeromexico, the unsecured claimants are going to have to VOLUNTARILY AGREE to take 10% for each $1 of claim (and even then I can't make Apollo's DIP-for-equity swap quite work).  I think this will be a very difficult thing for them to accept as they watch Apollo take all of the equity below them.

 

Apollo has real leverage here, though.  If they force their DIP loan into the super seniority position, then Aeromexico liquidates and all creditors below them lose.  Even Apollo doesn't want that, I don't think -- because that scenario ratches up risk even for their DIP loan recovery since Aeromexico's ongoing equity valuation gets marked to zero.  The unsecured creditors and other senior lenders will do the same math I'm doing here and their smart advisors could call Apollo's bluff in a crazy game of chicken.

 

Is there a deal here somewhere - maybe?  I really don't know. But I think every bull case that blithely says an Aeromexico Chapter 11 is no biggie is whistling past the graveyard, IMHO.  Especially since this is not a typical environment for an airline bankruptcy.  Can Aeromexico earn what it used to earn before - or is its business irreparably damaged?  I will also take a pass on that question.

 

Now perhaps AIMIA had no choice in its negotiations with Aeromexico.  Due to constraints like Mexico's regulations outlawing distributions creating negative equity or the requirement for PLM to redomicile to a US legal entity structure creating a deemed disposition for Mexican capital gains taxes, I have no idea if these were real show-stopping constraints.  But I would've been happier if the Mittleman's gotten a $200m USD distribution for AIMIA before all of this mess instead of what's behind Door no 2 (a minimum value for seven years plus extension).  Especially since the entire bull case for AIMIA rests on PLM.

 

But I am always congenitally paranoid of managements' bull case scenarios.  Its a personal flaw and I'm trying to improve myself.  8)

 

Regardless, can I say that I am honestly enjoying the back-and-forth on this and appreciate the engagement from everyone.

 

wabuffo

[5xEBITDA]

do you think Mittleman will be able to out-negotiate Apollo on a transaction? Not sure of the answer but something to consider.

 

Not to be a bummer, but it is safe to assume there is 0% chance Apollo loses in this situation

[Dr. Aybolit]

for the 5 years from 2010 to 2014, Aeromexico's EBIT averaged USD 197M, vs. the USD 139M wabuffo's spreadsheet assumed using 2015-2019, and while more recent is usually more relevent, the longer term picture points to potential. 

 

given the cost savings contemplated, and the likely drop-off in domestic competition, EBIT could be much higher if air travel returns to even approaching prior levels of demand, which is probably what Apollo is betting on.

 

Delta appears to have paid around 14x EBIT for their 51% stake based on year-end 2015's EBIT of USD 192M. 

 

hard to imagine they walk away from more than $800M invested without significant ongoing participation given the enormous value the Delta partnership provides to Aeromexico. 

 

don't forget renewal fees to PLM from AMEX and Santander beginning 2025 should make it easier for Aeromexico to fund buyout of Aimia's 49% of PLM, especially if those can be negotiated to be brought forward (like Air Canada got TD, CIBC, Amex, and Visa to do in funding AC's buyout out Aeroplan).

 

lastly, i wouldn't get out the worry beads over the negative cash flow for Aeromexico near term.  Air Canada burned -US$437M in 2006, -$2.04B in 2007, -$929M in 2008, -$351M in 2009 before turning positive with +$725M in 2010, +$360M in 2011, +$199M in 2012, and significantly net positive FCF since then.

 

Aeromexico stands alone amongst its domestic competition in the provision of premium / business class.  Mexico's President AMLO flies Aeromexico instead of his own presidential jet.  And it's a relatively young fleet.  And Delta JV is not yet even close to fully exploited.

 

So I don't think anyone should assume the long term EV should be determined by the first year post COVID.

 

-Dr. Aybolit

[wabuffo]

Continuing on the thread about Aeromexico's PLM stake being thrown into the DIP collateral kitty...

 

Filing by PLM Premier in response to DIP Collateral Agreement not providing its consent. The negotiated deal between AIMIA and Aeromexico is now officially a mess.

 

Aeromexico not assuming these agreements is the same as not assuming an airplane lease.  It potentially sets up a rejection of the agreement.  I'm not suggesting Aeromexico in any universe wants to walk away from PLM - but the ambiguity is....interesting.

 

Lots of soothing noise about "working things out"collaboratively .... LOL.  I wonder what Apollo’s role in all of this is.

PLM believes it holds substantial claims against both the Debtors and others related to the procurement of the Prepetition Amendments and these advances. As of the date hereof, the Debtors [Aeromexico] have declined to assume the Club Premier Agreements, but are continuing to perform under the Club Premier Agreements in the ordinary course of business

In short, even in the Debtors’ bankruptcy, the Debtors’ shares in PLM, and their rights in the Club Premier Agreements, cannot be pledged as DIP Collateral without PLM’s consent. PLM does not consent. PLM agreed to a business partnership with Aeromexico; not a business partnership with an Apollo-led syndicate of hedge funds and other asset managers.

PLM has had a long and successful relationship with the Debtors, and is hopeful for a consensual resolution of the issues around the Club Premier Agreements and the DIP financing before the final hearing on the DIP Motion. Nevertheless, PLM reserves all rights and remedies

 

I know Homestead31 accuses me of always looking at the dark side of life - but my suspicious mind is painting a very ominous scenario of where this might be leading.

 

wabuffo

Court_Document_285_-_Statement_of_PLM_Premier_S_A_P_I_DE_C_V_regarding_Debtors.pdf

[Stuart D]

Mittleman interview.

[Homestead31]

as always wabuff, i do respect the work you are doing, i am just not sure that the conclusion always has to be chicken little.

 

you of course may be right that this might end badly, but it is also worth noting that pre-COVID, airlines had actually come to be regarded as pretty good businesses due to the oligopoly industry structure, strong tailwinds from emerging market growth, and of course the dependable cash flows from they loyalty programs. 

 

now in a COVID world airlines are considered terrible businesses, and i think you are seeing everything through a COVID lens.  and that might be the right lens.  only time will tell.  but if you are Apollo, and you are coming within a barge poles' length of the situation, you must have a view past COVID, and if you have a view past COVID, you must realize that the loyalty program is the most valuable part of any airline, and you must realize that AeroMexico is primed to be a huge beneficiary in a post COVID world not only because the rest of Mexican competition is being hollowed out, but also because Mexico is likely to be a big beneficiary of the re-shoring of Asian supply lines, which will greatly increase travel - expensive business class travel - in Mexico. 

 

so again, who knows what will happen, but Apollo is likely thinking about this as at least a 10 year investment, and in that time frame the value of PLM will become more and more evident....  so one possibility tied to the back and forth re: PLM as collateral would be that Apollo simply bids for the balance of PLM outright in the near term.  I'm not putting all my eggs in that basket or anything, but i continue to think that everyone at the table knows that PLM is the real prize, and if Apollo were to shake out the couch cushions, they could find the money to bid some kind of discount to the $400M floor in a negotiated agreement.

 

i'm not aggressively suggesting that that will be the outcome - just saying there is a wide range of possibilities.

[Homestead31]

and if you're going to quote from that filing, you should include point 5 in its entirety

 

"The Debtors have expressly told PLM that the Debtors are not purporting to pledge their interests in the Trust Agreement without PLM's consent; consistent with that representation, the DIP Motion conditions the pledge of the Debtor's rights under the Trust Agreement upon receiving PLM's consent. On that basis, and because the DIP Motion does not appear to seek authority to pledge other rights and interests under the Club Premier Agreements, PLM does not object to the interim relief sought in the DIP Motion."

 

in other words, there is nothing to see here except that AeroMexico confirmed that they don't have the right to completely screw Aimia, and Aimia is saying since you have agreed you can't completely screw us, you can continue to negotiate the DIP.

 

that sounds like progress, no?

[wabuffo]

Homestead31 - if I were AIMIA, it’s not the DIP loan that would worry me in that filing.  It’s that Aeromexico has so far DECLINED TO ASSUME the Club Premier Agreements.  It doesn’t matter what they say, it’s what they do (or don’t do in this case) that matters.

 

It would also be helpful if that filing clarified what the “Club Premier Agreements” means.  Does it mean the amendments or the original 2010 agreements with the two AIMIA UK subs that each hold 24.45% of PLM?

 

wabuffo

[Cigarbutt]

...

It would also be helpful if that filing clarified what the “Club Premier Agreements” means.  Does it mean the amendments or the original 2010 agreements with the two AIMIA UK subs that each hold 24.45% of PLM?

wabuffo

i am now following from the sidelines, with interest, since the world has been changing.

There are shareholders agreements (between Aeromexico and Aimia) and commercial agreements (CPSA, between Aeromexico, Aimia and PLM, commercial participation and management services).

i assume the to-be-decided (at some point) assumption or rejection of the relevant commercial agreements (can be considered contracts) will come from the debtor-in-possession and, by definition, the decision should include the initial contracts, as well as the amendments agreed upon up to the day before the filing (and after money left the joint venture in an accrual-type of way), when long term got a new meaning.

From a distance, it appears that Aeromexico obtained concessions while in the driver's seat knowing that somebody else would be driving soon.

This is really interesting. Usually BK courts defer to the DIP for such decisions but rejecting contracts with yourself (a 50%+ joint venture) does raise some questions, but the saga between Aeromexico and Aimia suggests that this will be anything but simple and there is a very sophisticated player involved during this interesting transition.

[EricSchleien]

This was awesome

 

 

https://acquirersmultiple.com/2020/08/ep-79-the-acquirers-podcast-chris-mittleman-severe-value-mittleman-brothers-aimia-and-two-decades-of-value/

[wabuffo]

i assume the to-be-decided (at some point) assumption or rejection of the relevant commercial agreements (can be considered contracts) will come from the debtor-in-possession and, by definition, the decision should include the initial contracts, as well as the amendments agreed upon up to the day before the filing (and after money left the joint venture in an accrual-type of way).... the saga between Aeromexico and Aimia suggests that this will be anything but simple and there is a very sophisticated player involved during this interesting transition.

 

For airline bankrutpcy geeks - the link below is to a great webinar from late July that covers recent events in airline restructuring efforts (using American, United Continental, and Delta as the main examples) as well as a deeper dive into airline bankruptcy law and possible debtor/creditor strategies/scenarios.

 

https://reorg.com/resources/webinars/airline-liquidity-bankruptcy/

 

Of particular note, at the 27 min mark, the webinar restructuring expert takes a look at the Ch.11 process and airline loyalty programs using the United Mileage Plus Holdings (MPH) recently-created capital structure.  Of course, PLM's structure is different than MPH's structure, but the presenter does make some very interesting generic points.

"these (loyalty programs) are held together by the kind of things that bankruptcy lawyers salivate over ... executory contracts, such as the license agreement, multi-year purchase and redemption agreements, inter-company transfers, purchases and redemptions of miles, intercompany loans, license transfers, etc.."

 

"the conflicts between airline creditors are held off by agreements and equity ownership that seem inviolable outside of bankruptcy"

 

"but if the airline files, it could reject the sub-license agreement from the mileage program, challenge mileage pricing, dilute mileage value, or create a new program (leaving the legacy mileage program without an airline)"

 

Do I think Aeromexico is refusing to assume its agreements/amendments with PLM Premier because it is preparing to walk away from its 51% ownership? I would be surprised at that scenario transpiring.  But what it is doing (or more likely what its experts are advising it to do) is maintaining maximum optionality in its Chapter 11 strategy.  Aeromexico mgmt is no longer fighting for its old shareholders (they're likely wiped out) - it is trying to manage a carefully supervised cage-match between all of its lenders and creditors (many of whom are experienced vulture investors who have replaced the former, friendlier lenders/creditors at pennies to the dollar).  So it doesn't matter what Aeromexico's management promised (or is still promising) AIMIA, they are out of the picture now and the DIP lenders like Apollo and the restructuring advisors like Rothschild are in charge of what will happen next and they have no loyalty (pardon the pun) to AIMIA or even PLM.

 

That's why I always thought it was naive to assume that 1) Aeromexico was going to avoid a Chapter 11, and b) even if they did file, everything was going to go smoothly for AIMIA because they had "collateral" and amended shareholder agreements to protect their interest. Aeromexico was already pre-disposed to view AIMIA as a free-rider to the value being created in PLM by Aeromexico's core business.  Now, we also have new players like Apollo who view AIMIA as nothing but a complete obstacle to be overcome in any way legally possible so as to maximize the value of Apollo's end-state investment.  In my view, AIMIA had a small window to force a dividend recap while Aeromexico was desperate (perhaps it was never possible, we'll never know). That window is gone (if it ever existed), and the results gained (guaranteed min. buyout price and extension to 2050) may be dragged back to the bargaining table for a total renegotiation on terms.  I'm not saying AIMIA is going to wind up with zero, that's silly.  But in my mind, their resolve and legal defenses are about to be pushed to the brink.  It will be interesting to see how AIMIA does at the end of this Chapter 11 process.

 

wabuffo

[Dr. Aybolit]

I'm no bankruptcy expert, but can Aeromexico really reject a contract they signed a day before filing chp. 11? 

 

How would they explain the reasoning to the judge?  "Your honor, although we signed this one day before filing our petition in your courtroom, we feel its terms are no longer suitable for our changed circumstances." 

 

Wouldn't that constitute pre-petition fraud, or at least a bad faith rejection that the court would thus not allow if Aimia contested it?

 

https://www.justice.gov/jm/civil-resource-manual-60-executory-contracts-bankruptcy

 

B. Standard of Review By Bankruptcy Court. A debtor's decision to assume an executory contract is subject to review under the "business judgment standard." See, e.g., In re Orion Pictures Corp., 4 F.3d 1095, 1099 (2d Cir. 1993); In re Gardiner, Inc., 831 F.2d 974, 975 n.2 (11th Cir. 1987); In re Health Science Products, Inc., 191 B.R. 895, 909 n.15 (Bankr. N.D. Ala. 1995) (Bankruptcy courts must approve a debtor's decision to assume or reject an executory contract "unless there is bad faith or a gross abuse of discretion." In other words, the court must decide "whether the decision of the debtor is so manifestly unreasonable that it could not be based on sound business judgment, but only on bad faith, whim, or caprice.").

 

 

[Cigarbutt]

Mittleman interview.

Two comments and bothersome rhymes with awesome but it's not the same.

1-Present valuation and what to do about it

With an opinion that the common shares are undervalued and with a share buyback program in place, why would one focus so much on visibility (sell side analyst coverage, additional listing, that interview..)?

2-Present valuation and Berkshire's performance in the early 70s and what to do about it (take two)

The interviewee suggests that Mr. Buffett had "trouble getting good valuation" (...) then because of uncertainty around the Washington Post investment and related to noise around the SEC investigations (...). IMHO, from 1970 to the end of 1974, BRK share price, with some volatility, simply followed the overall market, especially in the general 1973-4 downturn. In addition, in 1974, the insurance business, which was becoming the main business, had a very poor year. There were investment losses that year and Berkshire was in a net loss position in its equity portfolio of almost $16 million, but the Washington Post component was only $2.6 million of that and BRK, that year, grew book value by 5.5% versus a total return loss of 26.4% for the S&P 500. It seems to me Mr. Buffett was not looking for visibility and timing of interviews was characterized by a clear alignment between his and other people's money. In the early 70s, Mr. Buffett quietly grew intrinsic value and, in fact, took advantage of others' perceptions, while keeping risk at a very low level and it looks like valuation eventually took care of itself.

 

@wabuffo

Thanks for the reorg webinar (interesting stuff). In the past, i've been involved in bankruptcies and, in retrospect, am happy about the overall outcome but am now looking for one-foot hurdles.

[5xEBITDA]

Mittleman interview.

Two comments and bothersome rhymes with awesome but it's not the same.

1-Present valuation and what to do about it

With an opinion that the common shares are undervalued and with a share buyback program in place, why would one focus so much on visibility (sell side analyst coverage, additional listing, that interview..)?

2-Present valuation and Berkshire's performance in the early 70s and what to do about it (take two)

The interviewee suggests that Mr. Buffett had "trouble getting good valuation" (...) then because of uncertainty around the Washington Post investment and related to noise around the SEC investigations (...). IMHO, from 1970 to the end of 1974, BRK share price, with some volatility, simply followed the overall market, especially in the general 1973-4 downturn. In addition, in 1974, the insurance business, which was becoming the main business, had a very poor year. There were investment losses that year and Berkshire was in a net loss position in its equity portfolio of almost $16 million, but the Washington Post component was only $2.6 million of that and BRK, that year, grew book value by 5.5% versus a total return loss of 26.4% for the S&P 500. It seems to me Mr. Buffett was not looking for visibility and timing of interviews was characterized by a clear alignment between his and other people's money. In the early 70s, Mr. Buffett quietly grew intrinsic value and, in fact, took advantage of others' perceptions, while keeping risk at a very low level and it looks like valuation eventually took care of itself.

 

@wabuffo

Thanks for the reorg webinar (interesting stuff). In the past, i've been involved in bankruptcies and, in retrospect, am happy about the overall outcome but am now looking for one-foot hurdles.

 

Most of Aimia's purchase price of Mittleman is paid out on the sooner of the stock hitting $6 I believe or Mittleman hitting some AUM threshold. Since the former is probably the most likely to happen, he is massively incentivized to get the stock price up soon. 

[wabuffo]

The Aeromexico bankruptcy court docket continues to provide great nuggets of valuable information.  One of the requirements is that the Debtor must provide from time-to-time financial reports of its bankruptcy-remote subsidiaries in which it has a controlling interest.  Naturally, the one we're interested in is PLM Premier and sure enough Aeromexico just posted Item #316 - Debtor's Periodic Report.

https://dm.epiq11.com/case/aem/dockets

 

There are a number of these bankruptcy-remote subs, but I clipped the four pages related to PLM Premier (balance sheet, income statement, cash flow statement, and changes in shareholder equity).  Provided are numbers for full year 2019 as well as the first six months of 2020.  So even though AIMIA hasn't completed its Q2 report (which I still don't understand why not - but that's a whole 'nother question), we get the most complete look we've ever had at PLM's numbers.  I've attached the pdf of the four pages as an attachment down below.

 

Here is the balance sheet (once again, you know the drill -- click on the image for full-screen).

The things I noted is that Aeromexico's loan and prepaid seat purchase by PLM are on the books at the end of Q2.  Also PLM still has an ample amount of cash ($41m USD).

Here is the income statement.

No question but that PLM is feeling the impact from Aeromexico's troubles.  Adjusted EBITDA annualized for 2020 (based on six months so far) is $46.6m USD vs $72.2m USD in 2019.  So applying the 7.5x multiple in the LOI would yield a real-time value of $350m USD buy-out value for PLM at the end of Q2, 2020 (although there are adjustments for net cash and Aeromexico's liabilitities in that valuation formula) vs $541m USD valuation at the end of 2019.

 

Finally, and more interesting, is the cash flow statement.

I've added some of my notes here.  The cash flow statement makes obvious the related party direct loan to Aeromexico but does not make obvious the prepaid seat purchase.  Since it was on the balance sheet, it must be in the cash flow statement somewhere.  So I reconciled the working capital items from the balance sheet vs the cash flow statement and added my little note.  It looks like the prepaid was netted against specific working capital items in some non-obvious way - but its there as the difference between the two methods is approximately $50m USD.

 

This brings up a separate interesting item.  If PLM had not made the two "loans" to Aeromexico, its cash on hand would've risen to $141m at the end of Q2 despite relatively low net income.  Its free cash flow for the first six months would've been $74.5m USD vs $84.7m USD for all of 2019.  This repeats the phenomenon we saw in the United Mileage Plus Holdings presentation which saw a Q2 surge in one-time cash inflows because of reward miles being returned due to flight cancellations resulting in cash flowing back to PLM from Aeromexico.

 

Overall an informative insight into PLM financials.  I don't think there's a mandated publication schedule to these periodic reports in bankrutpcy cases.  In one other case I followed closely that had bankruptcy-remote debtor-controlled subsidiaries, they were published every six months, IIRC.  That may not be a hard-and-fast rule though, and Aeromexico may publish them only when they feel like it.

 

wabuffo

PLM_Premier_Financials.pdf

[wabuffo]

@wabuffo  Thanks for the reorg webinar (interesting stuff).

 

If you enjoy these reorg webinars, they just posted another one titled "Latin American Airlines Deep Dive" dated Aug. 14, 2020:

https://vimeo.com/449306021

It's not as interesting as the other one you watched, but it does give an overview of the three airlines in Chapter 11 (Aeromexico, Avianca, LATAM - as well as a review of the restructuring happening at the Brazilian airlines - Gol/Azul).

 

The Aeromexico portion starts at the 14:30 mark and gives an overview of the capital structure, operations, assets and attempts at funding the Ch. 11 case. 

 

The only insight I got from the Aeromexico piece was that at the time of this presentation, the DIP filing had not been made public yet on the Court Docket, so the presenter was going from "industry sources/scuttlebutt" that Aeromexico was seeking a two-tranche $700m USD DIP loan facility.  By the end of the presentation, during the Q&A portion of the presentation, the DIP filing was made public on the Court Docket, so their was a quick review of it.  There was a bit of surprise at the increase from $700m to $1B, it seemed to me.

 

I wonder what happened during August's Aeromexico DIP negotiations?  Why did the size of the DIP increase?  Was DIP funding widely available and cheap?  Did Aeromexico's cash needs suddenly grow because results were poorer than forecast?  Were Reorg's sources just not that plugged in to what was really going on? 

Who knows...

 

Regardless - take a listen/view and if more Aeromexico Ch 11 stuff gets posted, I will post a link here.

 

wabuffo

[wabuffo]

It appears that the Mittleman fund made a new major purchase in Q2, 2020.

 

Gaze in wonder, AIMIA shareholders!  I give you... Cineplex (CGX.TO)!

 

In the MIMBros Q2 report, they say "the position was initiated in Q2"...and was "the second most impactful detractor in Q2".  :(

 

I also believe they have posted their idea as a new writeup on Valueinvestorsclub in July.

 

There's a thread on CGX on these boards as well:

https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/cgx-cineplex/

 

wabuffo

[Homestead31]

honest question wabuff - are you a former Aimia employee who got blown out when Mittlemans took over?

 

it is clear your knowledge level is high, it is clear your economic interest is low, and it is clear that for some reason you really do not like the Mittlemans.

 

What else would explain this fact pattern?