AIM.TO - Aimia

[LTcap]

Thoughtful, good post.  Thank you

[wabuffo]

Thoughtful, good post.  Thank you

 

Look - I may be reading too much into the rescheduling and cancellation.  The Judge could just be having a scheduling conflict and its nothing more than that.

 

wabuffo

 

[wabuffo]

We now know that the delay is indeed because the Aeromexico DIP is in a bit of trouble.  A fight has broken out between Apollo and the other bondholders.

 

https://www.bnnbloomberg.ca/apollo-and-bondholders-clash-over-1-billion-aeromexico-loan-1.1501605

 

The bondholder group, which took part in the first $200 million tranche of the debtor-in-possession financing led by Apollo, is trying to hold on to bargaining power, the people said. The two sides have diverging opinions about what they initially agreed to.

 

Bill

[LTcap]

Thanks. Disappointing but I guess not too surprising. Seems like last ditch effort by legacy bondholders. Article says below, which certainly seems like something that can be worked out. Legacy bondholders have to realize that Apollo will be driving this bus. If bondholders wanted to drive, then they should've provided the majority of the DIP.

 

"The disagreement stems from debate over how much power Apollo will have to make key decisions"

[wabuffo]

which certainly seems like something that can be worked out

 

A recent order (Doc 993 - filed yesterday) by the Bankruptcy Judge in the Avianca Ch. 11 case is interesting.  He has imposed a deadline by close of business today for updated cash flow projections and budgets on which the proposed DIP loans are predicated.

 

The judge pointedly asks:

Will the Debtors have sufficient financial resources if the DIP loans are approved to make all required payments and remain in compliance with all terms, covenants and conditions included in the DIP loans if, for example, the Debtors remain cash flow negative for (i) 12 months, (ii) 15 months, or (iii) 18 months?

 

Are DIP lenders getting nervous?

 

wabuffo

[LTcap]

wabuffo - Once again, fear mongering. Can you provide evidence that the airline backdrop has worsened since all agreed to the DIP 5 wks ago?

 

Also, I would again point out the bond holders are disputing over the language in the DIP RE: Apollo’s decision-making power. The article you sent says nothing about bond holders wanting better economics.

[Dr. Aybolit]

flights in/out of Mexico City ticking up a little.  green shoots?

 

https://www.flightradar24.com/data/airports/mex/statistics

 

 

[Homestead31]

https://www.streetinsider.com/Globe+Newswire/Grupo+Aeroportuario+del+Pacifico+Reports+Passenger+Traffic+Decrease+of+38.3%25+for+the+Month+of+September/17437210.html

 

Big Mexican airport operator reports traffic down 38.3% YoY for September.  It was down 51.4% YoY for August.

 

Green shoots indeed.

 

[wabuffo]

Its hard to see green shoots in the September Aeromexico traffic data...I thought they were adding all those thousands of flights....

https://aeromexico.com/cms/sites/default/files/September_2020_Op_Stat.pdf

 

Domestic RPK up a bit sequentially but still running 30-40% below historical (Sep 2019 comp. was an extremely low RPK month at 877, typical month is 920-1000).  International RPK declined vs Aug (344 in Sep vs 436 in Aug) and was barely above July levels (328).  Versus prior year international is still down over 80%.  I would bet international would also be a good proxy for how much business travel is down as well. 

 

International/business is where most of the revenues are and all of the profit and those two travel segments are still pretty much dead. 

 

These are not good numbers. 

 

Meanwhile DIP hearing has been postponed til end of October.  They were basically walking in to see the Judge to get DIP approved in Sept. and now its been pushed out a month.  Wonder what the source of the dispute is.

 

wabuffo

 

 

[LTcap]

Traffic improved 10% m/m and opening more international flights. Spin how you want but that is trends generally moving in the right direction.

[wabuffo]

International makes up 60% of Aeromexico's ticket revenue (and most of its marginal profit) and it actually declined in September.  I don't think that's spin.  You are pointing to a small increase in high-cost domestic flights with zero business travellers as a sign of progress?

 

They are still likely incinerating cash at a furious pace with these kinds of traffic statistics.  And now the second tranche of the DIP (plus $100m of the first $200m tranche) is delayed due to Apollo not being able to rein in the ad-hoc lenders committee.  The issue seems to center around Apollo's rights vs the ad-hoc lenders under the equity conversion option.  My guess is that Apollo isn't getting the sign-ups for equity that they need to make the DIP work, given the skimpy collateral pool and the continued poor airline industry results.  There is a general Court hearing date on Oct. 27th, but the DIP approval isn't even on the agenda for that hearing - so as of now, there is no date on the Court calendar to approve the DIP.  The DIP approval deadline set by the Court was originally Oct. 20th - but everyone has an incentive to extend it, if needed.  Only $100m of the DIP was approved and disbursed so per Aeromexico's CF budget from July, the airline runs out of cash (even with the $100m) sometime in November. 

 

BTW - you should welcome this scenario of increasing stress on Aeromexico.  This scenario might force PLM to be thrown into the DIP collateral pile to beef up the assets backstopping the second tranche thus opening up a possible deal with AIMIA sooner rather than later.  Unfortunately Aeromexico has little cash to offer to AIMIA for their equity stake. (the currency of exchange might be equity in the reorganized Aeromexico post-reorg with a little bit of cash).

 

 

wabuffo

[LTcap]

Recall from their last public earnings call, Aero said they only want to operate FCF+ flights.  The development that Aero is adding flights is a huge positive, IMO.  Aero wouldn’t be adding NEW flights if the existing flights were not covering cash. There are other costs that may make consolidated FCF still in a burn dynamic, but at the most fundamental level – per flight economics – it seems like the number of FCF+ flights is increasing. That seems positive to me.

 

Aero Earnings Call April 22: “From the beginning of this crisis early in March, our mantra was we will operate flights that cover cash. We do not want to be out there operating flights that do not cover costs."

 

Comparing Sep vs. Aug for international is not fair due to seasonality. Just examine 2017 and 2018 and 2019 …

 

International Passengers…

 

Aug 2017  = 695K

Sep 2017 = 586K

M/M = -16%

 

Aug 2018  = 735K

Sep 2018 = 616K

M/M = -16%

 

Aug 2019 = 694K

Sep 2019 = 563K

M/M = -19%

 

Aug 2020 = 112K

Sep 2020 = 91K

M/M = -19%

 

[wabuffo]

Fair points about seasonality.    Sept MOR should come out next week.  This will gives us another look at cash burn actuals vs their June DIP CF budget. 

 

Their cash balance on a consolidated basis was $107m at the end of Aug per the MOR.  But that includes the cash balances at their non-debtor affiliates like PLM per the note in the filing - so cash at the airline was probably only $50-$75m since PLM is a bit of a cash-box and had $41m in cash at 6/30.  They did get half of the $200m DIP first tranche but are probably still burning $50m per month in cash.

 

Things must be getting pretty stressful right now at Aeromex HQ with no DIP approved.  They could run out of cash completely by the end of November if the DIP doesn't get approved soon.  Right now there is no scheduled date for reconvening the Court.  (The next general hearing is Oct. 27th but it covers other administrative matters). 

 

The other Latin American airlines got their DIP cash (Avianca, LATAM) and sit on top of cash piles of over $1B each. 

 

You might interpret this as doom-and-gloom on my part - but I actually think this could force a decision on PLM this month in order to get the DIP approved.  My bet is that the ad-hoc lenders want more Aeromexico collateral in order to accept the DIP paying them back partially or totally in Aeromex equity at Apollo's discretion.

 

So this could be good news/bad news for AIMIA.  Good news - AIMIA's 48.9% stake gets "sold" to Aeromexico in Q4.  Bad news - the proceeds are a mix of a small amount of cash (probably via PLM's cash on hand), a large amount of equity in the reorganized Aeromexico, plus maybe a call option premium in cash.  Further bad news - PLM's fair market value is devalued in order to close the deal vs what AIMIA shareholders are expecting.  This would be right out of the Avianca/LifeMiles DIP playbook that just unfolded this summer in their Ch. 11 case.  It was actually surprising that Aeromexico's DIP motion was going so smoothly when both Avianca and LATAM had to rework their initial deals due to disagreements between lenders and/or the Court.

 

I'm not saying this is a certainty, of course.  The most likely outcome is that the DIP lenders come to a resolution and everything proceeds according to plan.  But a reworking of the plan involving PLM is a possible outcome that is rising in probability every day that no DIP gets approved.  The fact that Aeromexico has not assumed any of the contracts between itself and PLM is very telling.  You'd think that would be a slam-dunk no-brainer given the importance of PLM to Aeromexico.  By not assuming them, it gives Apollo leverage to renegotiate the terms.  Of course, everyone wants Aeromexico to get DIP funding and emerge from Chapter 11 - but bankruptcy proceedings are notorious for their hard-ball, bare knuckles environment.  The path to gaining a Plan of Reorganization that the Court can approve is a contact sport. 

 

Just my 2-cents and of course I could be very wrong.  It is a very fascinating business case to watch, though.

 

wabuffo

[wabuffo]

Well - that was fast.  Hearing with the Court concerning the DIP loan is now set to go in half-an-hour (2pm).  I guess they worked things out and everything's a go.  We should know more about what changes, if any, were required to get everyone to sign off. 

 

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

 

wabuffo

[LTcap]

Thank you for the heads up wabuffo

[wabuffo]

BBG is reporting that Bankruptcy Court has approved the DIP Loan.  Waiting to see reports and/or filings for details. 

 

wabuffo

[tytthus]

Airline loyalty programs appear to be worth more than the actual airlines.  But without the airlines, the programs could lose value:

 

https://marker.medium.com/why-the-survival-of-the-airlines-depends-on-frequent-flyer-programs-2509bd3f25d0

 

“The Financial Times pegs the value of Delta’s loyalty program at a whopping $26 billion, American Airlines at $24 billion, and United at $20 billion. All of these valuations are comfortably above the market capitalization of the airlines themselves — Delta is worth $19 billion, American $6 billion, and United $10 billion. In other words, if you take away the loyalty program, Delta’s real-world airline operation — with hundreds of planes, a world-beating maintenance operation, landing rights, brand recognition, and experienced executives — is worth roughly negative $7 billion. But economics of the loyalty program don’t work without a robust airline operation.”

 

Conclusion:

“The airline business was perfectly optimized for the economics of 2019, offering a mix of cheap-but-uncomfortable seats, lucrative last-minute business-class tickets, and, of course, a durable fintech business. Today, the fintech business is the only part of the airlines that investors are excited about, but if airlines dramatically scale back their flights and routes, those loyalty programs could become worthless, too.”

[Homestead31]

the board has done some great work here on Aeromexico and the bankruptcy, and while risks remain, i think we can all agree that the process is proceeding as smoothly as can be expected.

 

therefore, i think it might be time to start spending some time trying to figure out what the story with Kognitiv is.  Clearly at this point its mostly a black box, although they have said they expect cash flow positive in 2021.  who knows if that will come to pass as in some ways it is surely tied to global travel etc., which in a Covid world cannot be counted on.

 

that being said - i'm going to throw out some positive considerations.  i of course realize there are negative considerations as well, but i am sure wabuff and others will take great pleasure in pointing those out.

 

so in no particular order, here are some things to think about

 

1) as with all things Aimia, insiders are aligned, have bought a ton of stock personally, and have also put a buyback in place.  i think its safe to say they wouldn't have done those things if they thought Aimia was a one trick pony a la PLM.

 

2) if you read between the lines on the conference calls when they reference Cardyltics, it seems clear that the plan here is to IPO Kognitiv in the not too distant future

 

3) take a look at the recent Nuvei IPO, which was the largest canadian IPO in history.  its a different businees - Nuvei is focused on payments - but there are some parallels.  Nuvei is burning $100M a year, growing through acquisition, and trading at ~20x revenue because it is "sexy"

 

4) the excitement around Nuvei seems to be that they do payments for online gambling.  to my knowledge Kognitiv is not attached to online gambling at this point, but it seems like an absolute no brainer. 

 

as i understand it, the way kognitiv works is that someone like a retailer or whoever can go to the "loyalty capital network" in order to find rewards (unused hotel rooms, flights etc) and then use them as customer incentives.  so one example that we are familiar with would be a car dealer that offers $1,000 cash back when you buy a car.  instead of cash back, they could offer a trip somewhere or something like that to a consumer that has greater than $1,000 value, but maybe costs the dealer less than $1,000 because the hotel etc is happy to unload its unused inventory.

 

this model seems like it would be a perfect fit for online gambling - rather than cash you could take your winnings in the form of travel etc.  it seems like this model would also work with online gaming as in video games.

 

i don't know how the mechanics of that would work, but i do know that that is the sort of story that the market would put a huge multiple on, and investment banks would be lining up down the block to run that IPO

 

5) prior to the Aimia merger, kognitiv bought a blockchain company.  an IPO touted as "online gambling rewards secured by blockchain" would probably trade at 8 billion times revenue in this market.

 

anyway - this is all of course just speculation, and i realize it may sound ridiculous considering what we know about the corporate history of Aimia's loyalty business.  that being said, it seems like the narrative here could go in new directions, and narrative is what sells IPOs at high multiples.

 

thoughts appreciated

[samwise]

 

1) as with all things Aimia, insiders are aligned, have bought a ton of stock personally, and have also put a buyback in place.  i think its safe to say they wouldn't have done those things if they thought Aimia was a one trick pony a la PLM.

 

thoughts appreciated

 

I still think PLM is the most important pony here, the others are smaller stakes. We should do very well if Aeromexico survives the current episode (with chapter 11,22,33 if needed) , AIM still owns PLM at the end of it, and the Mexican air traffic recovers and grows in the next 10 years. A couple of big ifs which wabuffo is focused on. Oh and they need to cover corporate costs by buying some cash flow with the cash they have.

 

However I have wanted for some time to understand alignment here. The mittlemans stake is actually from their funds, I.e. ownership is of their LPs. So just how much alignment is there? Do the mittlemans own a large stake in their funds? What if more LPs leave, does the mittlemans stake in AIM keep dropping? At a certain level they could be open to activists, and yet they have sold MIM to AIM. This is clearly their permanent capital vehicle, but how do they intend to retain control?

[Cigarbutt]

PLM is a key piece of the puzzle.

Value harvesting here is a function of the extent and duration of recovery. In previous similar episodes, airlines recovered profitability within 2 to 3 years but this is an unprecedented downturn. Many governments (not Mexico) are supplying debt to airlines which rests on the assumption, for now, of a relative V-shaped recovery. An added dimension for Aeromexico is that one needs to assume that the trend in emerging countries' share of international travel will continue over time. They are reporting soon.

https://www.iata.org/en/iata-repository/publications/economic-reports/record-loss-in-2020-extending-to-2021-but-at-a-lower-level/

https://www.routesonline.com/news/29/breaking-news/294347/recovery-tracker-the-global-market-we-oct-11/

 

AirAsia (Big Loyalty) is a smaller piece of the puzzle. It was already struggling with the "trade war" and now Covid. Recent developments include a potential 98% (!) haircut for unsecured creditors and a Malaysian government backed loan.

 

i think winter is coming. The above can be safely ignored as i've been thinking that winter is coming for the last 2 years+.

[wabuffo]

i think winter is coming.

 

- corporate/business travel makes up 12% of airline passenger traffic but 75% of total airline profits.

- corporate/business travel is tied to 40% of all loyalty credit cards (ie - credit cards with consumer front-of-wallet status).

 

What is the current status of corporate/business travel?  What will it look like post-pandemic?  What if there is a dramatic change in behavior by companies and individuals in this segment regarding future corporate/business travel?

 

Airlines are already dinging the small-time non-business traveller with low fares, but fees for everything else.  Can fares be raised sufficiently to make up for the loss of corporate travel without further depressing load factors? 

 

In addition, airlines are accumulating massive amounts of rewards liabilities which are still accumulating due to banks continuing to buy points for credit card spending (and some airlines trading even more future seat liabilities for cash now) but face a dramatically reduced outlook for available flights and seats (unless you really want that free flight to Albuquerque or Saskatoon).  This compounded by piling on real debt on top of this growing points liability.

 

So you have potential seat reward liability (and loyalty op subsidiary debt) climbing fast while available seats is falling way down. Will consumers continue to see the value in flight rewards and willingly pay for high-annual fee travel rewards credit cards when the airlines inevitably hyper-inflate away the value of the rewards (as they must inevitably do)?

 

These are the questions that roll around in my mind and for which I don't have answers.  Airlines make something like 60% of their revenue from tickets sold to passengers and 40% from selling loyalty points.  A single class of passenger (the corporate "road warrior") missing in action could torpedo both sources of revenue dramatically.

 

Seems to me this is not an ordinary airline crisis like past crises. 

 

wabuffo

[LTcap]

Yes, business/international travel will take time to recover.  But you have to ask yourself what is being priced in?  Let’s assume:

 

1. Kognitiv stake is worthless.  This also implies those who invested in Kognitiv’s Oct 2019 financing are very dumb.  B/c they invested at a standalone value of C$400mm.

2. Clear Media is only worth cost of $75mm.  This also implies Jack Ma, 2nd richest person in China & highly successful operator/investor, is not smart b/c I doubt he invested to earn a 0% IRR.

3. Cash & preferred at par.

4. Overhead is $0.  AIM only needs ~C$20mm from PLM to cover its excess overhead.  PLM generated C$110mm+ of EBITDA and FCF (< C$1mm CapEx) last year implying C$55mm to AIM.  Again, AIM only needs C$20mm so COVID would have to have a massive and LT impact for PLM dividends not to cover excess overhead.  Mgmt is also looking to buy companies w/FCF so then less or no PLM dividends required.

 

At AIM’s current share price of C$3.80, AIM’s PLM stake is being valued for only ~ US$220mm.  Recall, Aero bid US$180mm in July 2018.  Even AIM’s old and awful Board was smart enough to reject this low ball bid immediately.

 

Let’s not forget Aero agreed to a minimum buyout price of US$400mm + pro rata cash (> $50mm) just four months ago.  Not that much has changed since that time.

Let’s also not forget that Apollo committed $1b to Aero and multiple airlines recently levered their loyalty programs on the basis that they are still very valuable.

 

 

Lastly, I believe just AirAsiaX (AirAsia's long-haul) is restructuring.

[wabuffo]

Kognitiv stake is worthless.  This also implies those who invested in Kognitiv’s Oct 2019 financing are very dumb.  B/c they invested at a standalone value of C$400mm.

 

That $400m (as I've shown before) was related to a mark for Kognitiv common shares (and preferreds convertible to common shares at the same price) equal to $17.50 USD.  That mark has been shredded completely since then.  I think that sends powerful clues as to the value of the legacy Kognitiv business despite all the happy talk.

 

Urbana Corp (an investor in Kognitiv) had already marked down its Kognitiv stake to $13.20 USD well before the merger in March, 2020.  Then the merger was struck at a price of $9.11 USD per Kognitiv common share in June.

 

And now we have this from Aimia's Q2 report (which was delayed - more about this in a moment!) p.31 of the MD&A section and which came out in September.

The fair value of Aimia's investment in Kognitiv has been estimated at $88.7 million and is based on a combination of valuation techniques and inputs, including the financing round completed concurrently with the transaction, other recent Kognitiv financing rounds, discounted future cash flows generated from the new combined business and a market approach derived using a multiple of projected earnings.

Aimia owns 20.163 m fully diluted Kognitiv common shares as I have shown upthread.  So $88.7m CAD converted to USD using June 30, 2020 forex rate = $66.85m USD for its 49.3% stake (which was supposed to be 49.0% per the original announced deal - again, more about this in one second.)  If one divides a $66.85m USD stake by 20.163m fully diluted Kognitiv common shares, that values Kognitiv at $3.32 USD per fully-diluted common share. 

 

So there you go - that October 2019 Kognitiv mark has gone from $17.50 in December 2019, to $13.20 at the end of March to $9.11 in mid-June to $3.32 in mid-September.  I don't know much about the Kognitiv business, but I can do math from public filings and that sequence makes for a bad price chart.  Does that sound like a great business to you?

 

Back to the Aimia Q2 filing delay as promised.  I now have a theory about why Aimia had to delay its Q2 filing. 

 

If you recall, the original deal when it was announced had Aimia contributing $21m CAD plus the ILS/ISS businesses with Kognitiv investors kicking in an additional $14m plus its legacy Kognitiv business into the merger.  Aimia would end up with 49% and Kognitiv with 51%.

https://www.newswire.ca/news-releases/aimia-loyalty-solutions-and-kognitiv-corporation-merge-to-form-a-visionary-leader-in-loyalty-876373537.html

But when the deal actually closed, the numbers from the Kognitiv side changed (only $10m showed up at close instead of $14m) and I wondered about what would happen to the 49%/51% ownership split?

https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/tsxaim-aimia/msg424978/#msg424978

 

Buried in the Aimia Q2 report (p.4 of the MD&A) is this little note:

After June 30, 2020, Kognitiv obtained additional financing of US$2.0 million in the form convertible promissory note from another investor. After the closing of both the contribution of Loyalty Solutions and the cash investments, Aimia owns 49.3% of Kognitiv.

Is this the reason why they couldn't or wouldn't close the books on June 30 for the Q2 report? The Kognitiv investor side had come up way short vs its capital commitment at the close of the deal on June 18th.  They closed the deal anyway.  But Kognitiv must've promised that it would find additional capital.  Meanwhile, is it possible that Aimia was over 50% ownership and therefore Kognitiv was a controlled subsidiary from an accounting POV? This could’ve changed Aimia's accounting of Kognitiv's balance sheet on its books at June 30th.  But AIMIA typically publishes its Q2 results in mid-late July.  So this means that even as late as July, Kognitiv still hadn't located the necessary capital to get the ratio back in line.  They finally got it "after June 30, 2020"... but even so, AIMIA owns more than it wanted (49.3% vs 49.0% per the original deal).

 

If true, this is almost comical.  But I believe it provides some context to Kognitiv as a business and an investment.  It could still all work out.  I have no idea.

 

In the end, I don't think it matters much since AIMIA gets a money-losing division off its books.  I wouldn't count on more than that when it comes to Kognitiv since even its own investors had to have their arms twisted to put in more money by the looks of all this.

 

wabuffo

[LTcap]

wabuffo - As you know, Urbana posts marks every week.  The latest is at ~$12/sh (https://www.urbanacorp.com/net-asset-reports/), no? If you agree, why is your math so far off?

[wabuffo]

wabuffo - As you know, Urbana posts marks every week.  The latest is at ~$12/sh (https://www.urbanacorp.com/net-asset-reports/), no? If you agree, why is your math so far off?

 

First - you are quoting a $CAD price (Urbana's price is in $CAD).  You need to incorporate exchange rates because officially Kognitiv common shares are priced in $USD.  Urbana has been marking Kognitiv common at exactly $9.11 USD per week every week since the deal closed. ($9.11 USD was the deal price)

 

 

Second - it isn't my math.  What we have here is Urbana claiming its Kognitiv shares are worth $9.11 USD per share - while Aimia is claiming they are only worth $3.32 USD per share in their Q2 report issued in September.  Who are we to believe?

 

 

Here's another way to think about it.  If we knock out Aimia's cash investment for the note and the preferreds (= $20m CAD), then the value of ILS/ISS exchanged into the merger is being valued by Aimia at $68.7m CAD ($88.7m-$20m).  Alexander Capital appraised that business at ~$25m-$30m CAD in their November 2019 report.

 

By sticking to its $9.11 USD per share valuation, in effect, Urbana is saying that the value of the ILS/ISS business exchanged into the merger is worth $224m CAD.  Right? Its just math.

 

So again, who are we to believe?  If anything, even Aimia might be dragging its feet on its Kognitiv mark (if one uses the Alexander Capital report for the Aimia Solutions biz exchanged value).

 

wabuffo