AIM.TO - Aimia

[gokou3]

Sucks to be a shareholder today.  Free cash flow for 2016 was ~$200M.  Assuming things stay as-is until the AC agreement terminates (i.e no new partner, no merger / buyout / activist, etc), Aimia will need to use all of its cash flow and more in the next 2 years to pay off its debts maturing in Jan. 2018 ($200M) and May 2019 ($250M).  Any hope of the company aggressively buying back the common/preferred shares would be too optimistic, agree?

[writser]

I spent a few minutes looking at this and it looks to me as if they got paid cash for points, paid out that cash to shareholders and are left with the liabilities. What happens if their business shrinks the next few years (suppose they don't find a good alternative for the AC plan) and people start to spend points instead of save them? Seems to me as if a 'point run' could easily bankrupt the company. Wrong way to look at things? I see a lot of talk about being able to pay off debt but deferred revenue is a much larger liability and if I understand correctly they already account for 12% leakage. What do you guys think is the intrinsic liability (and what are the cash requirements) of the issued points in several scenarios? Or should I take the Warren Buffett approach and see it as a 3b asset?!

 

Any insights / primers would be appreciated. I'm a bit out of my depth here.

[screefer]

From PrefBlog

http://prefblog.com/?p=35002

 

"As far as the stated reason for suspending dividends is concerned, well, having $2-billion goodwill on the balance sheet vs. $115-million of shareholders’ equity doesn’t help matters much, and neither does a Retained Earnings (Deficit) balance of $2.7-billion. I’ll need a little convincing before I believe that “past common share issuances at significantly higher prices than the current market” has anything to do with. Looks more like the company has simply pissed away its capital."

[Guest roark33]

Seems like the longs, people here and on VIC are under-estimating the risks:

 

1. Top of the wallet to bottom of the wallet.  No new float coming in is not a good situation for AIM.  If people stop using their Aeroplan cards, you basically have a situation where all the benefits of a float are reversed.

 

2. Liabilities pulled forward.  Even if people know they have three years to use their rewards, they may begin to use them much faster.

 

3. Why would WestJet partner?  Even though Aimia has lots of purchasing power, they need to have a lot of unused capacity to make it worth their time and money to partner with Aimia to sell this capacity at a discount to market. 

 

If they sign a new deal in the near future, this could work out ok, but it seems like there are some catastrophic risks not being taken into account here.  (but the stock does seem to be taking these risk into account).

[Foreign Tuffett]

I spent a few minutes looking at this and it looks to me as if they got paid cash for points, paid out that cash to shareholders and are left with the liabilities. What happens if their business shrinks the next few years (suppose they don't find a good alternative for the AC plan) and people start to spend points instead of save them? Seems to me as if a 'point run' could easily bankrupt the company. Wrong way to look at things? I see a lot of talk about being able to pay off debt but deferred revenue is a much larger liability and if I understand correctly they already account for 12% leakage. What do you guys think is the intrinsic liability (and what are the cash requirements) of the issued points in several scenarios? Or should I take the Warren Buffett approach and see it as a 3b asset?!

 

Any insights / primers would be appreciated. I'm a bit out of my depth here.

 

I was looking at this last week and saw some of the same things. The equity could be a zero if members accelerate point redemptions before the Air Canada agreement expires. I think to invest in this you have to trust that management will make moves to enhance the program's value proposition to consumers. I don't see any reasons to trust this management team, so I'm staying away.

[longlake95]

Gee what a mess. For me, my simple filter: "would I buy the whole business and keep present management?" has keep me out of the this name. Doubt WJ will partner with Aima, they already have a points program and partner with RBC for credit cards that earn points.

[misterkrusty]

gokou -  the 2018 notes have been refi'd using the credit facility, which matures mid-2020.  so depending on spending patterns with Aeroplan credit cards, they might have cash to do buybacks, but probably won't consider doing so until new airline partners are secured.

 

writser - in a worst case scenario, Aeroplan can re-write the redemption rules at will.  of course this could seriously damage the Aeroplan brand, so it's only a last-ditch solution.

 

roark/longlake - every airline has unused capacity.  filling up those last unfilled seats brings huge incremental margins.  I have little doubt WestJet could find a way to work with Aeroplan, and it doesn't have to involve their FFP.  Sure, they already have a credit card partnership with RBC ... so what?  As long is it isn't exclusive, why wouldn't you bring in more revenue?  Also, keep in mind that Aeroplan isn't limited to partnering with just one airline.

 

It all boils down to lining up attractive new flight options for Aeroplan post June 2020, and doing so quickly such that members don't stop spending on their Aeroplan credit cards. 

 

I have no position in the equity but do still own some preferreds.  If the 2019 notes ever trade back to ~80 they might be interesting too.

[petec]

I'd add that if Aeroplan has a run on the bank it's probably done, but it should be in a separate legal entity that can be allowed to die and the other assets have a good chance of covering the value of the prefs.

[writser]

I'd add that if Aeroplan has a run on the bank it's probably done, but it should be in a separate legal entity that can be allowed to die and the other assets have a good chance of covering the value of the prefs.

 

Yeah, I was wondering about that. What's the legal status of loyalty points? Are they senior to equity? Preferred equity? Maybe technically not but I have a hard time believing that they can impair / rewrite their loyalty programs while the equity still has significant value. At the very least there would be a huge backlash. Interesting stuff.

 

Looks to me as if Aimia is in a bit of a pickle. They desperately need cash to keep the machine running but with all the bad news partners drop out, customers will redeem points so they need even more cash - rinse and repeat. Hard for me to judge whether Aimia can survive that in the short term - I have no clue how customers will react and what the resulting cash flows will be (if everybody was like me they'd be bankrupt already). Also I have absolutely no clue about the chances of them striking another airline contract. Situation seems dire and management seems incompetent - not a good negotiation position. This name is too difficult for me but I see the upside potential.

 

Has anybody actually tried modelling some scenarios?

[screefer]

Has anybody actually tried modelling some scenarios?

FWIW...

 

https://seekingalpha.com/article/4078021-aimia-offers-deep-value-investors-high-risk-tolerance

https://seekingalpha.com/article/4081743-aimia-deferred-revenue-redemption-threat-manageable

 

[misterkrusty]

writser-  I agree the situation could be dire.  but we just don't know what redemption & accumulation trends are. 

 

traffic to the aeroplan site doesn't appear to be spiking:  https://www.semrush.com/info/www5.aeroplan.com  but frankly I'm not that worried about a rush to redeem with 3 years left on the contract.  more concerning to me is accumulation trends - mainly the level of spending on Aeroplan credit cards.  and that's why the CFO and board member departures worry me.

 

I would think that in the worst case scenario they gate redemptions, leaving enough value in the cash & equivalents plus businesses outside of north america ($88m combined ebitda in 2016) that the debt is money good with enough left over to cover at least the current $94.5m market cap of the preferreds.  how much better than that I don't really know.  The equity would be toast.

 

but I'm not a big believer in the WCS.  I don't see why - if nothing else - they couldn't just strike a deal with Air Canada to buy all their flights at Market Fare rates, which would be an incremental ~$60m/year at 2016 levels of member activity.  Loss of Air Canada FFP is maybe about an $80m hit to EBITDA.  But then there's apparently $70m of cost savings.

 

Just to make a point, I'll assume for a moment that accumulation & redemption patterns stay around 2016 levels, which equates to ~$220m FCF.

 

$220

-80

-60

+70

=150

 

my point here is that Aeroplan could get a lot less popular and there would still be enough FCF to cover the $17m of preferred dividends and pay off the debt when it matures.  Also probably enough left for the equity to support the current $225m market cap - but as for upside on the stock, I'll leave it to y'all to run your own numbers.

 

 

 

 

 

 

[misterkrusty]

also, I disagree that management seems incompetent.  They could be, but I don't think we've seen any evidence.

 

We don't know what went on in negotiations with Air Canada, so it's way too early to blame them for AC's decision.  Frankly, I suspect that decision had to do mainly with events beyond Aimia's control - namely the recent entry of WestJet into the business class market (see my earlier post).

 

Suspending dividends was a prudent move - I gotta admit that even though I own some pref shares.

 

Mgmt has stated in at least a couple press articles that finding new reward partners is their top priority, as it should be.  They've also said they're keeping close tabs on redemption & accumulation trends, as they should. 

 

Lastly, while we don't know what's the real reason those directors are leaving, I frankly would have cut the board down to 9 people if I ran the show.  what board needs more than 9 members?  you save money and make faster decisions.

[Cigarbutt]

Several good points.

 

In these cases, it often gets worse before it gets better. The reason why this is an opportunity is that there is a clear risk for a downward spiral.

 

Somehow holding the preferreds here feels like being scheduled for a vasectomy. You thought about it, you know it is probably the right decision, you assume that people know what they are doing and you expect some pain but you could always cancel the appointment.

 

Keeping an open mind here. I think they did the right thing by rapidly and completely cutting the dividends (technical rule or not). This feels uncomfortable but the context may bring a catalyst for improvement earlier. Added some more.

 

-On their cash flow business model, downside and upside

 

Over the years, they have produced free cash flows that were used essentially to pay dividends and buy back shares causing the accumulation of retained earnings deficiency. BTW petec, you may find what you are looking for on p112/189 of the 2016 AR, Consolidated statements of changes in equity. Retained earnings = (2,74 billion). The GW of Aeroplan is 1,68 billion and 85% of GW for all of Aimia. Without AC, the trend is clearly unsustainable whichever way you look at it. The run issue is important but I don't think that this is a problem now. The risk is that once a run starts with the redeemers, things could go downhill very rapidly.

 

Looking at different scenarios and comparing to the recent links from seeking alpha, I still think that there is some margin of safety for the preferreds if Aimia has to integrate less profitable alternatives.

 

My opinion is that Aimia allowed itself to be vulnerable. I still think that they can recover value by somehow negotiating a new deal with Air Canada and preserving the inherent value in Aeroplan. Looking at this from the outside, I assume that they are trying to build negotiating leverage with AC (with alternatives). They have to balance the positive of building that leverage versus the negative of value erosion of the brand as time passes by. Given the relative precarity of the situation, I would tend to say that they have to act rapidly even if that means a better deal for AC. I recognize that we have to rely on management and this is hard to assess.

 

 

[clutch]

Just looking at this from a high level perspective, I wonder if the commons is now a better bet?

So the price has dropped 30% since the news of the dividend cut. Wasn't the market expecting this already for the commons (in contrast to preferreds)? In fact, many here wanted the company to do this. So, it seems like a major panic move by many investors.

Maybe i'm being too simplistic...

[petec]

Just looking at this from a high level perspective, I wonder if the commons is now a better bet?

So the price has dropped 30% since the news of the dividend cut. Wasn't the market expecting this already for the commons (in contrast to preferreds)? In fact, many here wanted the company to do this. So, it seems like a major panic move by many investors.

Maybe i'm being too simplistic...

 

The dividend cut is a major transfer of wealth from common to pref: they will now get the cash in the business before the common shareholders do, which was not the case before.  The prefs will double to get back to where they were before if things go OK, and could treble to par if things go great or if the company is broken up, plus they accumulate their dividend (the commons don't).  There is a decent probability they are not a zero, but they probably need to be worth much more than the current price before the commons are worth a cent.  Prefs all the way for me.

[Cigarbutt]

I have considered the common as well.

This is not an investment that you buy and don't have to worry about for years.

 

When looking at these "distressed" cases, I try to remember what Mr. Buffett said during a Berkshire Shareholder meeting:

 

"Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do. It’s imperfect but that’s what it’s all about.”

 

My humble way to see it:

 

For Aimia preferreds, the most likely returns lie between -50% and +100%, with a positive skew.

For Aimia common shares, the most likely returns lie between -75% and a four-bagger, with a negative skew.

 

I hope to continue to do well over time with these basket cases but there is no guarantee.

This is a grey zone but I submit committing capital in the common instead of preferreds here marks the difference between investment and speculation.

[samaniv]

I agree that there are several consumer related trends ( run on the points , usage etc.) and it's hard for us to determine how consumers are reacting. I'm sure if everyone was watching the market closely , they would redeem points , decrease usage etc. But the fact is a lot of these people are everyday individuals and even with the news coverage, they might have missed it or misunderstood it.

 

I asked some of my friends ( I am Canadian ) who use Aeroplan points and they seemed pretty clueless. They heard something about it in the news but didn't think much of it. It didn't seem like big shifts but it's hard to extrapolate this and know what is happening with the masses.

 

Another point is you can simply line up and withdraw your points like a bank run. To redeem points you need time off for a vacation , planning etc. which mitigate the redemption risk to some extent. If I had to guess , I would say most people aren't following this as closely and taking big actions on it - probably instead a more wait and see approach - but again it's a guess - k don't know.

 

 

[Uccmal]

I am out.  Took a loss, not too severe after accounting for dividends. 

 

I simply dont trust this situation.  Even if it recovers somehow, in a rising interest rate environment, the prefs wont get much above where they were a few weeks ago. 

 

 

 

 

[Sergio8]

It seems to me that the decision to cut dividends in order to preserve liquidity is wise or at least cautious. It looks like that while deferred revenue was favorable to cash generation in the past, it may weigh negatively on the business in the future, and it is very hard to assess the extent of the impact.

 

If we back out deferred revenue from cash and liquid investments (probably a bit too severe as the business historically has positive margins), we get a heavily indebted business, and it would need 5 years of historical cash-flows just to pay down the debt.

 

Of course, should the company be able to replace its lost contract, the impact would probably be somewhat mitigated... But figuring the future remains tricky.

 

I am aware that I am not an expert of the situation, just trying to figure things out, and the situation looks quite compex to me (it seems to me that we can't just take historical financials and extrapolate them to figure out the cash-flows), with a levered balance sheet.

 

Can someone that studied this company for sometime tell me how he looks at the balance sheet issue there? Is it easy for you to be comfortable with the deferred revenue portion of the business and its debt levels when you know the business well?

 

Thank you in advance for your insights.

[petec]

In a rising interest rate environment, the prefs wont get much above where they were a few weeks ago.

 

But they are (lagged) floaters!

[misterkrusty]

the Series B/2 preferred coupons are reset every 90 days.  a rising rate environment would be great for them.

 

sergio - the redemption liabilities need to be considered when calculating an EV.  but as far as liquidity issues go, they're not exactly liabilities that are due on demand.  Aeroplan can adjust the redemption rules at will (at some cost to the value of the brand), or in a worst case scenario cancel the Aeroplan program alltogether.

 

[Uccmal]

In a rising interest rate environment, the prefs wont get much above where they were a few weeks ago.

 

But they are (lagged) floaters!

 

Yeah, my mistake.  I have too many balls in the air. 

 

I reread part of this thread where we (the group) go back and forth. 

 

Cardboard was consistent in advising people to avoid the common which was good. 

 

Otherwise, the thesis has changed dramatically through the course of the thread.  We started with speculation about whether they would get the renewal with AC and what those terms might be.  Now, the general theme is: Will there be a run on the bank?  Can they service their debt, especially after paying out 120 million a year for the last few years?  Did they borrow from the future?  Will they get another partner?  Will the terms with another partner be as good as with AC (not likely)? And so on.  The thesis is definitely different. 

 

I expect, once they get it all sorted out they will honour the cumulative on the prefs... they pretty much have to unless they go into CCAA.  But I wont be there to participate.  It is likely a farly good Graham style investment but it doesn't fit my byline which is my mission statement. 

 

I have been repositioning my holdings across the board into companies that have long runways, consistent earnings, and consistently raise their dividends.  In the long run it will work. 

[kab60]

I'm also out. I picked the pref because I thought it would do okay without an extension and it actually did after the indiscriminate selling. That's when I should've sold, but I sucked my thump and have taken a 30 pct. loss instead of 10 pct. after divys. I think it was a good and assymetric bet, but now it's a different case, and I can't really figure out the odds other than the common looks more attractive now. I knew from the start that I knew too little about this business, so here's to sticking to simple stuff, preferbly with a boooring name.

[Cigarbutt]

More perspective on potential options and outcomes.

Here's a link with comments at the end.

One comment refers to an article about Westjet (from a few years ago).

 

https://seekingalpha.com/article/4085113-aimia-preferreds-foresight-20-20?page=3

https://www.theglobeandmail.com/globe-investor/westjet-takes-aim-at-aeroplan/article4316401/

 

[petec]

No sign of a run on the bank so far.