AIM.TO - Aimia

[Cigarbutt]

Cigarbutt, why do you say that there are high potential redemption pressures? Thank you for your help.

I don't know the specific redemption policy at MIM but assume that investors can redeem periodically. I understand that they manage LP money and separately managed funds.

Today, MIM reported to CDN regulators that 10K shares had been bought and 534K shares were sold (presumably from SMAs).

 

The following is unaudited (and the numbers are estimates) and is derived from the 2019 Q3 letter and other sec filings.

 

Share symbol              % weight in MIM money pot (top holdings)            % performance since end of year to today (dividends not included)

      REV                                      ~20                                                                                        -30.2             

      AIM                                      ~20                                                                                        -33.9

      IGT                                      ~8                                                                                        -55.0

      AMC                                      ~7                                                                                        -49.7

 

Smaller holdings have done better, more in line with what happened to the R2000 index (which is down 24.0% YTD).

So, you can come up with your own conclusion at to what investors may want to consider in terms of redemption. 

[samwise]

If air Mexico goes banckrupt , does PLM suffer? Aeroplan used to dive whenever air Canada was in trouble, because they could then reject the contract.

[Cigarbutt]

The relation between Aeromexico and Club Premier (PLM) is symbiotic.

PLM's survival is highly conditional on parent survival.

The sky is not clear and it looks like there's turbulence ahead but there are potential options.

Aeroplan did its part for Air Canada in 2009.

https://www.cbc.ca/news/business/air-canada-gets-1b-in-backing-1.824549

[Cigarbutt]

Cigarbutt, why do you say that there are high potential redemption pressures? Thank you for your help.

I don't know the specific redemption policy at MIM but assume that investors can redeem periodically. I understand that they manage LP money and separately managed funds.

Today, MIM reported to CDN regulators that 10K shares had been bought and 534K shares were sold (presumably from SMAs).

 

The following is unaudited (and the numbers are estimates) and is derived from the 2019 Q3 letter and other sec filings.

 

Share symbol              % weight in MIM money pot (top holdings)            % performance since end of year to today (dividends not included)

      REV                                      ~20                                                                                        -30.2             

      AIM                                      ~20                                                                                        -33.9

      IGT                                      ~8                                                                                        -55.0

      AMC                                      ~7                                                                                        -49.7

 

Smaller holdings have done better, more in line with what happened to the R2000 index (which is down 24.0% YTD).

So, you can come up with your own conclusion at to what investors may want to consider in terms of redemption.

This is a follow-up.

Disclosure of a mistake: This (Aimia equity securities) is a painful part in the portfolios now and, somehow, the "net-net" floor is being tested. The mistake was position sizing which I let slip upwards too much. Hopefully writing it will help in maintaining rational restraints in similar situations down the road. I now (wrongly) put the fault on the previous paucity of opportunities but position sizing should be an absolute concept, not a relative one.

 

Update, with the same reserves described above.

 

Share symbol              % weight in MIM money pot (top holdings)            % performance since end of year to yesterday (dividends not included)

      REV                                      ~20                                                                                        -57.1             

      AIM                                      ~20                                                                                        -38.3

      IGT                                      ~8                                                                                        -64.2

      AMC                                      ~7                                                                                        -64.1

 

      R2000                                  NA                                                                                        -37.7

 

Since the last post, MIM has reported net sales of 147K shares of AIM common equity, at a time when their self-determined discount to in-house IV calculations reached record lows.

As far as redemption pressures, i have no clue.

"Can't you hear, can't you hear the thunder

You better run, you better take cover"

Midnight Oil

[manuelbean]

Hi guys, what are actually the operating risks here? What might happen, what's the likelihood, etc? Don't spare your words, please. Thank you.

[Pref User]

Does anyone think a bailout of Aeromexico could actually be a catalyst to realize value for Aimia? To start off this theory only works based on the bailout and Aeromexico surviving.

 

My thought process, Aimia was created when Air Canada was in financial trouble they spun-off all of their quote-unquote unessential assets at the time and gave them sweetheart deals to boost their value (Chorus, That repair business that folded and Aimia) bring in a ton of cash for struggling Air Canada.

 

I was thinking there could be some contingencies on the bailout that Aeromexico needs to raise capital, and potentially extending terms on PLM and IPOing it would be the move to bring in cash. Assuming they did that at the $1B IPO price they discussed in the past this would bring in $511M USD which cover 26.8% of all their debt (excluding leases), without diluting shareholders (keeps delta happy, if they survive) and doesn't increase leverage in the business.

 

I also think that the preferred dividend will be stopped potentially for a year. The thinking, Aimia said on the Q4 call that they would be cash flow negative because of the taxes related to being a negative net income company but paying preferred dividends. This is somewhere around $10M, maybe more. I think PLM stops its dividend, as it is a negative working capital business, so when it stops growing its cash flow will turn quickly with less travel and people earning fewer points (i could be wrong here), which means goodbye $18M in the dividend from PLM. Yes, Aeromexico will hate that too, but I don't think that $18M will make or break Aeromexico because they already have a ton on their plate. Then I think there will be a drop in revenue at ILS, and let's say that leads to another -$15M in cash flow because they lose business or others cut back (ILS was private in 2008-2009 periods so I couldn't check back to see what happened then).

 

So it means keeping the preferred dividend Aimia for 2020 might be negative $43M in FCF, if you remove the preferred dividend, which I believe stops the taxes that save about $22M, which turns the cash burn to only $21M. At a $43M cash burn that is about 14% of their cash on the balance sheet used up. Currently, the only thing that I think could hold this back is that if the preferred dividend is stopped for the time being Aimia cannot return capital to shareholders until the dividend is fully paid. So Mittleman wouldn't be able to be buying back shares at a discounted price.

 

I would love to hear what everyone is thinking!!!

[bizaro86]

I think PLM should be more cash flow positive than before. Redemption of miles is probably down by nearly 100% given how many flights have been cancelled.

 

But consumers are still using their credit cards and collecting points. While spending is probably down, it's almost certainly down less than flight redemptions.

[Cigarbutt]

-I think bizaro is right and Aeromexico is cash-starved (reducing capacity even more in April) so they will look at all options to extract cash from PLM (regular or special dividend, IPO, even a loan? etc). You may remember that Air Canada went into bankruptcy because of 9/11 but the triggering event was SARS 2003...Eventually, it restructured and completely spun off Aeroplan when the market was quite receptive to the idea. The typical scenario is that airlines spin off loyalty units when they need money and then buy them back when they have excess cash..

 

-If Aeromexico is looking for a bailout, they may not get a receptive ear:

https://simpleflying.com/will-mexico-bail-out-airlines-in-crisis/

This negative domestic context may however help foreign capital gain more control of Aeromexico (like Delta?).

Under present circumstances and for the foreseeable future, there's simply too much capacity in that market.

 

-As far as internal decisions at Aimia, this largely remains a block box. Just a note: the tax bill on the dividend is large in Q1 because it takes into account the dividends of 2019 that included the dividends in arrears.

[Pref User]

That makes sense that redemptions will be down, so they'll make the spread. I was worried that there would be a run on points for other nick nacks, Aeroplan allows you to redeem for gift cards. So if you were worried Aeromexico goes bust you redeem your points, but that is closed since everything is related to travel.

 

Cigarbutt thank you for the article, I had not seen that.

 

The no-bailout then means, at least looking at my sum of the parts model, that the market is pricing in PLM is worth $103.5M USD to Aimia, and if you want to be completely risk-off that if you don't want to put any value on PLM Aimia shares would be at $0.46. I know much of the debate will be around if you subtract off the full value of the preferred shares (i do because if the preferred shares are not money good why is the equity). If you don't include the preferred shares, which I can see the argument that if PLM is a zero then I guess my argument changes because there is an agency problem between common shareholders and preferred shareholders, where common is in control and they'll want to maximize value, so it could be possible to say preferred shares aren't money good but common is since they have the option of cash. Preferred shares only change to money good once Aimia turns itself around. In that situation, I have the common worth $2.97 with PLM being a zero.

 

Again would love thoughts

[wabuffo]

Can anyone explain what these asshats are doing here?

 

1) they are asking shareholders to vote on a reverse stock-split of either 3-, 4-, 5-, or 6-to-1 with an odd-lot provision. 

 

One of the downsides of this operation occurs if/when the Company defers preferred share dividends for eight quarters (the language seems to indicate that this is not on a consecutive basis - so the previous deferrals count against the total), the preferred shareholders would increase their ownership stake vs the common from the current 9.1% to anywhere from 23 to 38% (dependant on the common share count reduction due to the reverse stock split).  I guess they are trying to get rid of the small shareholders - but what's the point of spending more precious cash on advisors to conduct this operation when it forces the Company to continue preferred share dividends (at a time when cash is even more precious) - or risk common equity dilution.  I'd think one would want to maintain optionality here vs the optics of a higher share price for cosmetic purposes.

 

2) they announced that they are forming an investment committee led by our two resident geniuses (Fischer/Mittleman)

"The Board also has broadened the Company's investment policy to permit Aimia to invest excess cash, recorded in the Company's financial statements as short-term investments, long-term investments and cash and cash equivalents, in a diversified portfolio of public company securities, fixed income securities and hybrid securities. This is in addition to existing permitted investments in investment grade commercial paper and corporate, federal and provincial government bonds, and bankers' acceptances or term deposits."

I think they are courting serious PFIC classification risk from the IRS unless they keep their money-losing operation running - which again.. why would you do this when cash is finite and sifting away.

 

Scratching my head.  Perhaps there's a brilliant insight here that I'm missing because I'm not a galaxy brain like this new Board.  I guess I'm a dirty finger-nails, knuckle-dragger kind of guy who would just stop all cash-dissipating operations (including preferred dividends) and fire all the high-priced marketing suits.  The point is to husband precious resources so that I could put time on my side to maximize the value of the one valuable asset that I have (PLM).

 

wabuffo

[samwise]

What should the geniuses do? multiple choices.

 

1. Tender/buy back the prefs at 50% of par.

2. close all money losing operations.

3. invest the cash in SPY.

4. 1 & 2 above, and be a straight passthrough for PLM. Even change the company name and ticker.

5. buy a cashflow business..hopefully from a desperate seller.

6. stock picking?

 

 

Any preferences?

I can't make up my mind here, but 4,5 seem reasonable.

 

Edit: but the description wabuffo showed points toward 6.

[Pref User]

I have not seen the document Wabuffo, but I don't understand how the preferred share ownership goes up if there is a reverse stock split? They are just reducing the share count and increase the share price, is what I thought a reverse share split did.

 

Looked this up, I get it now, thank you for bring it to our attention.

[Cigarbutt]

https://corp.aimia.com/wp-content/uploads/2020/04/Management-Information-Circular-Mar-27-2020.pdf

It's well explained in pages 15-16 of the pdf document.

I have no other comments apart from venting that this is quite painful to watch.

 

[Dr. Aybolit]

Cigarbutt,

 

Your March 17th post wrongly attributes these lyrics: "Can't you hear, can't you hear the thunder.  You better run, you better take cover" to

Midnight Oil when the I'm sure you know full well that song was by Men at Work.  I believe this was done to bait me into re-engaging on this message board.  Well played sir, well played...

 

I share your pain of the over-sized positioning here, but I do not consider it a mistake.  Image the man who made an over-sized bet on Berkshire Hathaway at $60 in 1972,  who complacently took the long-term view with the stock at $93 in early 1973, and yet stoically endured the pummeling to $38 in 1976 (around the time Buffett and Munger had to settle SEC charges of stock manipulation/securities fraud regarding Wesco & Blue Chip Stamps).  If only there were message boards back then... what were those bumbling geniuses thinking!

 

Anyway I see the recent news as progress.  Aeromexico should be much more pliant now that they truly need cash.  And PLM should be highly resilient, as Aeroplan was, even in 2003 after 9/11 and SARS when Air Canada went bankrupt, Aeroplan continued growing membership and generating cash, see page 19:  https://corp.aimia.com/wp-content/uploads/2017/11/Investor-Presentation-March-2009.pdf   

 

The move to invest some of the cash in securities is also encouraging, and seemingly well-timed.  It does not increase the risk of PFIC designation because cash counts just the same as securities on the passive asset test there.  So why not do what they said they were going to do?

 

I continue to be baffled by the lamentations against our saviors here, however flawed they may be.  Was anyone else in this thing before they got here? I shudder to think where we'd be with the old guard (Brown, Johnston, etc.) still in place, and yet that's exactly where we'd be had these guys not shown up. 

 

I much prefer earnest wannabees with massive skin in the game to careless country club types mailing it in, with no stock ownership. 

 

I bought more yesterday.  If buying $3+ per share in net cash for $2 is a mistake, I want to make it as meaningful a mistake as possible so my descendants, should they survive the impoverishment I will have inflicted upon the family at large, will learn this valuable lesson about position sizing.  "Grandpa bet it all on some pikers and a pile of cash... and look what happened... he died penniless, and insane..."

 

- Dr. Aybolit

 

 

 

[Cigarbutt]

Warning : The following will be unusually blunt.

 

I respect your periodic contributions but i’m mad at this investment, the ire of which should obviously be directed at my own madness. In my book, this investment has recently been written down to zero (this is a second time occurrence in my record; the last one written down to zero was a relatively small investment made in June 2016 that turned out to be a positive surprise in bankruptcy. But one can’t rely on luck alone).

 

This is particularly frustrating because I was fully expecting this global Chernobyl moment and was prepared for sorrows to come, not as single spies, but in battalions. I was foolish enough to think that I could get out in time when, in fact, both the equity and the preferred had stranded written all over them. Fuck.

 

You probably noticed that Mr. Buffett recently sold some airline shares as our champions are getting ready to plunge into treacherous waters. I submit that many ‘surprises’ are on their way and this is shaping up to be an environment where only the strong truly survives. If protracted, the emerging Mexican economy is looking to be trapped in the doldrums and looking at liquidation priority may be something you want to consider when comparing Club Premier point holders, Aeromexico creditors and joint venture partners. i’m hardly comforted by the next round of captains who barely look less idiot.

 

You’re correct on the re-engagement trigger and one of the songs I like the most from the band is Who Can It Be Now? It’s a story of a guy stranded in his house who doesn’t like his surroundings. “I'll be trapped, and here I'll have to stay” For now.

Life’s been good so far and it’s sunny today. And this is only to deeply put my nose into this shitty mistake and make the best of it. It seems like the PM 3-hr outdoors training session will be unusually intense and harsh.

 

[wabuffo]

Desperate times call for desperate measures, it seems.  Airlines are looking at their loyalty programs as piggy banks to be broken into in an emergency....  From the WSJ: (subscription required)

 

wabuffo

 

https://www.wsj.com/articles/united-delta-weigh-selling-miles-early-to-raise-cash-in-coronavirus-crisis-11586779535?mod=searchresults&page=1&pos=3

 

Banks routinely buy miles from airlines to reward consumers for spending on their credit cards. What they recently discussed is different: The banks would—all at once, and at a discount—buy miles they otherwise would have purchased in the future as cardholders accrued points. The cash infusion could help keep the airlines alive, protecting card partnerships that generate billions of dollars of annual spending volume.

[manuelbean]

Desperate times call for desperate measures, it seems.  Airlines are looking at their loyalty programs as piggy banks to be broken into in an emergency....  From the WSJ: (subscription required)

 

wabuffo

 

https://www.wsj.com/articles/united-delta-weigh-selling-miles-early-to-raise-cash-in-coronavirus-crisis-11586779535?mod=searchresults&page=1&pos=3

 

Banks routinely buy miles from airlines to reward consumers for spending on their credit cards. What they recently discussed is different: The banks would—all at once, and at a discount—buy miles they otherwise would have purchased in the future as cardholders accrued points. The cash infusion could help keep the airlines alive, protecting card partnerships that generate billions of dollars of annual spending volume.

 

In what ways could this affect Aimia?

[Homestead31]

Can anyone explain what these asshats are doing here?

 

1) they are asking shareholders to vote on a reverse stock-split of either 3-, 4-, 5-, or 6-to-1 with an odd-lot provision. 

 

 

 

I think this should be viewed in light of the rules around NCIBs in Canada.

 

you might think they are "asshats," but they also own an asshat full of common stock, which they have in some ways staked their careers on.

 

 

[Cigarbutt]

Can anyone explain what these asshats are doing here?

1) they are asking shareholders to vote on a reverse stock-split of either 3-, 4-, 5-, or 6-to-1 with an odd-lot provision. 

I think this should be viewed in light of the rules around NCIBs in Canada.

you might think they are "asshats," but they also own an asshat full of common stock, which they have in some ways staked their careers on.

-A question:

From before, you had mentioned that there were two options for Aeromexico: wait a decade or do a dividend recap.

Has the situation changed from your perspective?

 

-A back-to-the-future assessment

Last fall, Virgin Australia went to the market to sell innovative debt whose coupon was higher than the cash flow yield on the loyalty interest they were buying.

The bonds apparently trade now at 39 cents on the dollar.

https://www.theguardian.com/business/2020/apr/14/virgin-australia-considers-going-into-administration-as-labor-calls-for-government-rescue

Anything we can learn from this or is everything related to a perfect storm?

[Homestead31]

CB  - i  assume those questions were meant for me.  If anything I would say that Aeromexico is more likely to want to bring cash from PLM to Aeromexico, although seemingly their ability to do so has been diminished as credit markets are not as friendly now as they were pre corona. Separate but related, i have been of the view that if Aimia's PLM  stake were for sale (which it shouldn't be at this point), Delta would be the best buyer... but that ain't happening any time soon.

 

As for Virgin Australia, if i'm not mistaken they levered up the airline to buy the loyalty co, which is different than levering up the loyalty co which is what we are talking about with PLM.  There has always been a general assumption that the loyalty cos are recession resistant if not recession proof because cash inflows are tied to people using CCs which they still do in a recession, while outflows are tied to people cashing in points, which they may do less in a recession (nice to get your flight for "free" due to points, but you still have to pay for the rest of your trip, and this spending goes down in a recession).  At the moment, as almost no one is flying, i'd imagine that few points are being redeemed... so we will see, perhaps as early as next week when Aeromexico reports.

 

bigger picture - and to be clear, there is a long way to go between now and bigger picture - but bigger picture, i think that one result of COVID19 will be the shortening of US supply chains, meaning that it seems likely that at least SOME - if not alot - asian manufacturing could find its way to Mexico over the next few years post virus.  Presumably that would be good for routes to Mexico in general, and Aeromexico/PLM more specifically.  I would not suggest putting any value on that today however... which is a moot point since the market is essentially putting no value on PLM as a whole already.

[movys]

Can anyone explain what these asshats are doing here?

 

1) they are asking shareholders to vote on a reverse stock-split of either 3-, 4-, 5-, or 6-to-1 with an odd-lot provision. 

 

 

 

I think this should be viewed in light of the rules around NCIBs in Canada.

 

you might think they are "asshats," but they also own an asshat full of common stock, which they have in some ways staked their careers on.

 

what additional flexibility does a reverse stock split give them as it relates to a NCIB?

[Cigarbutt]

It would have been more fun to watch this from the sidelines but the evolution is fascinating.

 

-Loyalty units are under stress

For various reasons including pressures akin to a run on points and cash fow implications, loyalty units are 'adjusting' the redemption process.

https://thepointsguy.com/news/loyalty-programs-limiting-non-travel-redemptions/

 

-Virgin Australia recently entered 'Administration', have kept the loyalty assets separate and operating but only allow points accumulation and not redemption (!).

https://thepointsguy.com/news/virgin-australia-velocity-suspended/

 

-Aeromexico is trying to see 'this' through and used similar language (PLM = an unencumbered asset) on the last conference call.

It seems that various governments (will Mexico government simply nationalize one or two airlines?) are touting the idea of using the loyalty points as collateral for debt (!) and even to buy airline tickets in advance at a discount which is, in a way, equivalent to buying the deferred revenue for cash.

https://www.bloomberg.com/news/articles/2020-04-16/u-s-treasury-sees-airline-loyalty-assets-as-possible-collateral

If this is becoming relevant to Aeromexico somehow, i wonder how they feel now about the 'joint' partnership (for better or for worse kind). It's too late now but buying back the 48.9% part held by Aimia at a reasonable price would have been a win-win for both. In a short time, a lot has happened and this could go in many directions.

 

-Next Wednesday, we'll have to webcast listen how great the Aimia managers are..

 

[wabuffo]

Aeromexico is trying to see 'this' through and used similar language (PLM = an unencumbered asset) on the last conference call.

 

I think they were referring to their fleet of airplanes - ie. sale/leaseback transactions but possibly PLM too - its certainly possible.

 

Loyalty units are under stress

 

Not hard to see why.  According to Amex's CC - travel and entertainment spending is down 90%.  Credit card spending is probably down 30-40%.  So if you think of cash coming into PLM from gross billings from the credit card partners its probably down 50% or more.  And there's next to nothing coming in from the airline.  Use a two-thirds credit card/one-third airline points mix and I would guess gross billings are down 60%-65%.

 

Sure the direct costs of redemptions are down too but these loyalty companies have expensive overheads and nice offices.

 

Which makes me wonder if PLM is about to cut its dividend to PLM/Aeromexico?  Aimia already will be seeing a cash burn due to its own business and having to pay the preferred dividends, it can't really afford to lose the PLM dividend too.

 

wabuffo

 

 

[wabuffo]

shot....

Which makes me wonder if PLM is about to cut its dividend to PLM/Aeromexico?

 

chaser...

https://www.newswire.ca/news-releases/aimia-provides-update-to-the-market-on-impact-on-plm-from-covid-19-863200127.html

As the result of the negative impacts from COVID-19 on its business, PLM is now expecting materially lower Gross Billings, adjusted EBITDA and Cashflow in 2020.  Consequently, Aimia now expects distributions from PLM operations to be materially impacted.  

 

But by all means, go ahead with the reverse split, which will entrench the continued dividends to the AIM preferreds (or else dilute the common massively if they are stopped).

 

EDIT:

more news - Mittleman becomes new CEO, Aimia buys Mittleman's hedge fund and spins out ILS in joint-venture.  I don't see any cash coming in from any of these transactions...just more cash going out and a lot of plate-spinning.

 

Lucky AIMIA shareholders will get the benefit of Mittleman's stellar investing results and that spectacular portfolio of his.  I wonder how Mittleman's ownership of AIMIA shares gets treated in this consolidation?  I guess it reduces share count for financial reporting, but keeps the shares active from a voting perspective?  Kinda like Biglari Holdings structure?

 

Clown show...

 

wabuffo

[Cigarbutt]

More Kognitiv dissonance.