Description

AeroCentury is a former aircraft leasing company that owned regional jets and turboprops and leased them out to domestic and foreign based carriers. All together, the company owned 13 planes under leases to six airlines in the US, Canada, Croatia, Norway, and Kenya. Affected by the pandemic, the company filed for bankruptcy protection March 29, 2021. Through the course of the bankruptcy process, the company sold all 13 aircraft to Drake Asset, a hedge fund that acquired all of the secured debt and credit bid its claims in the auction. The first three planes leased to Republic Airways were sold on March 16, and the remaining 10 (listed below) were sold through the 363 auction in court for a credit bid of $83M.

While the bankruptcy was supposed to be a simple liquidation case, on July 14 the company filed a plan of reorganization that allowed the company to continue to exist, through the selection of a plan sponsor. On August 9, the company announced that it has selected a plan sponsor - Yucheng Hu, TongTong Ma, Qiang Zhang, Yunhua Li, YiYi Huang, Hao Yang, Jing Li, Yeh Ching and Yu Wang. The sponsors (listed below) agreed to invest $11M of cash in the debtors in exchange for 2.9M new shares to be issued at $3.85/share. None of them appear to have any connection to the company or its owners, and I could not locate any of their biographies.

Interestingly, the plan offers a recovery to the existing shareholders. Holders will keep their existing 1.55M shares (35% of the new float), receive a $1M cash distribution equaling $0.64/share, and receive trust units holding Series B preferred stock in JetFleet Holding (JHC), all together redeemable for $1M at JHC’s option. JHC is AeroCentury’s integrated aircraft managementment, financing, and marketing business and it is being effectively spun out of the company. For unspecified reasons, JHC will also receive all of the company’s UK assets (includings rights to tax refunds), and will be owned 35% by the sponsors and 65% by the JHC management team. JHC’s management team likely also includes Toni Perazzo, the 75 year-old widow of the former CEO. Toni owns 0.3M shares or 7% of the pro forma company. She was also the former CFO until December 2019.

On August 31 the bankruptcy court confirmed the plan with a plan effective date on or before September 30. Since then shares have rallied to $60, giving the company a $265M market capitalization. Per the plan valuation analysis, the company will have total assets of $15.4M, consisting mostly of the $11M of cash contributed by the sponsors. 

I believe this situation is an attractive short opportunity for the following reasons:

1. Existing shareholders may not be aware that all of the company’s aircraft have been sold. There are no remaining productive assets left. There might be a perception that this company might benefit from a recovery in travel - something like another Hertz, where shareholder recovery has exceeded prior expectations.

2. The plan sponsors are sitting on a $160M paper gain on their $11M investment and with no lock up agreement, are likely going to monetize their newfound wealth. In addition, Toni Perazzo is likely to sell her 7% stake since she will no longer be controlling ACY. Three of the five directors will be nominated by Yucheng's group and the remaining two will be mutually agreed upon.

3. Unlike Gamestop or AMC, there is no business left and as such the business will never be able to grow or pay a dividend. The value of a listed shell (if any) is likely much lower than the current capitalization. Unlike the infamous listed deli in New Jersey, this stock has a sizeable shareholder base and liquidity. Investors are domiciled in China, making any merger with a US company subject to CFIUS review. A merger with a Chinese company has many regulatory issues in today's environment.

Valuation:

Shares are worth $0.65/share dividend + $1/share distributable asset value + $0.65/share Series B pref value in trust certificates. The new investors appear to be only concerned that the new company is listed - the conditions precedent only require that shares remain listed on the NYSEAmerican Exchange. The record date for the dividend and Series B preferred shares will be September 30 (effective date).

Risks:

1. 100%+ borrow rate
2. Buying back the Series B Trust Interests might be challenging.

Catalyst

Sept 30 effective date.