Description

Investment Thesis:  Avation Plc’s 8.25%/9.0% Senior PIK Toggle Notes (AVTCAP 8 ¼ 10/31/26) at 92 or a 12.4% YTM offers a low double digit return in an aircraft lessor that is poised to grow EBITDA. YTM understates the return threshold as a refinance by year end 2025 is likely, this would result in a 14.7% YTRefi.  The bonds are comfortably covered by asset value. In a scenario where the company is acquired, the bonds benefit from a change of control. The change of control is significant as the company reported a takeover approach in November 2023. While a takeover did not materialize, the stock trades at a material P/BV discount to peers. Further deal interest would not be a surprise.

Due to illiquidity, we are focused on the AVTCAP 8 ¼ 10/31/26 bonds. One reason the bonds trade wide is the customer base of Avation is less well known, however over half (based on book value) of the company's fleet is leased to airlines who are publicly traded, credit rated and/or flag carriers. Optically high leverage on an EBITDA basis is another driver of a wide-spread, this is mitigated by significant asset coverage.

Company:

Avation Plc (AVAP LN) is a full-service commercial aircraft leasing company with a young and diversified fleet of 35 aircraft (at 12/31/23, 33 on lease and 2 off lease pending sales). The 15 customers include Braathens, easyJet, EVA Air, VietJet, Philippine Airlines, airBaltic. Aircraft types include narrowbodies (A220, A320/321), widebodies and regional ATR turboprops.

Avation is an aircraft leasing company focused primarily on airlines based in Asia (76% of the fleet by book value as of 12/31 /23) and Europe (24%). The company's fleet was comprised of 35 aircraft on lease to 15 airlines based in 13 countries.

Capital Structure:

Avation has made open market purchases/tendered for the 8.25s recently. On 12/28/23, that it had purchased $8MM of the bonds at $85.5. On 5/13/24, Avation purchased $10MM bonds at 85.75.

Over the past few years, Avation has reduced the number of off-lease aircraft in the fleet by transitioning or selling off-lease aircraft resulting in lower EBITDA. This trend will reverse in the near term as the fleet grows.

Bond Details:

AVTCAP 8 ¼ 10/31/26 bonds are issued under English law. The principles underlying the insolvency codes  of  the  United  Kingdom  and  the United States differ in some fundamental respects.

The main objective of Chapter 11 of the 1978 U.S. Bankruptcy Code is to maintain the business as a going concern, even if that reduces the proceeds available to creditors. As a result, the code has been deliberately designed to be debtor oriented. Rights are given to the debtor-in-possession  to  continue  running  the  business while  a  reorganization  plan  is  being  worked  out.

In contrast, the main objective of the U.K. Code has been to increase the likelihood of repayment of creditors’ claims. As a result the U.K. has had a  creditor-oriented  insolvency  process.  Under  this  code,  the company immediately comes under the control of an insolvency practitioner who represents the interests of creditors. The  concern  expressed  about  the  U.K.  system  has been that it encourages premature liquidation and companies to seek to avoid bankruptcy.

During COVID, in 2021Avation did not declare bankruptcy but  proactively worked with creditors. The company reached an agreement with holders of its former $342.6MM 6.5% senior notes due May 15, 2021 to extend the bonds' maturity in exchange for additional interest, warrants and a consent fee. These notes became the current 8.25%/9.0% Senior PIK Toggle Notes due 2026. The lowest the bonds traded was 65 in November 2020, down from 105 pre-COVID in February 2020.

The AVTCAP 8 ¼ 10/31/26 bonds sit below $437.5MM of secured fleet level debt. The company in August 2022 successfully extended the maturity date on its US$128.7MM aircraft warehouse loan facility by four years to Sept. 30, 2026, from August 2022.

The company is in compliance with its financial maintenance covenants, specifically on its tangible net worth to net debt ratio, which was breached in 2021 post-COVID.

Asset Coverage:

Optically leverage may look high, however the bonds are fully covered by the residual aircraft value. Leverage will continue to decline as new aircraft are delivered. The below waterfall demonstrates coverage of the bonds.

The company recognized delivery rights at $88MM on 12/31/23. On 5/20/24 the company sold two ATR 72-600s from its order book for $10MM in net cash proceeds. The ATRs were scheduled for delivery to Avation in Q4 2024/ Q1 2025. Avation currently has 10 more ATR 72s on order out to 2028 and 24 further purchase rights out to June 2034

Shareholder Involvement:

On Sept 29, 2023 long term shareholder Oceanwood Capital sold 13.Sm shares (about 19% of the company) of Avation at 79p, significantly below the market price at the time of 100p and the current market price of 112.5p.

Oceanwood was shutting down and a forced seller. The buyers were Rangeley Capital LLC & Christopher C. DeMuth Jr. acting in concert with Jeremy Raper. They bought more shares at prevailing market prices, and reached a position of 26% of the company on November 9^th 2023.

Pre-COVID, Avation had a strategic review in early 2020 when the share price exceeded 250p. COVID disrupted the sales process, and the stock never recovered.

In 2019, we received a proposal from an investor to buy the company. We haven't had one lately. Over a period of time you'll see more appreciation from investors for this sector: it has done super well out of COVID. You'll see consolidation. AVAP LN CEO May 2023.

On a podcast in late 2023, Jeremy Raper voiced his view:

I’ve raised money and entities I manage have taken a 20 something percent stake in a listed aircraft leasing company in the UK called Avation, AVAP. This is all public filings. And you know my goal is to maximize value for all shareholders. It’s ostensibly a very cheap equity and I have a number of ideas to kind of create value for all shareholders.

The activist case is based on AVAP LN trading under 0.5x book value compared to peers at 0.91x as demonstrated in the below from Canaccord on 5/24/24.

Chairman Robert Jeffries Chatfield controls Epsom Assets and is the second largest owner and has 17% of shares outstanding. The Bloomberg screen below duplicates the no 1 and no 2 holders, which are the same /related entities.

Customers:

The company's largest customers were Vietjet, AirBaltic, EVA, and Philippine Airlines. Over half (based on book value) of the company's fleet was leased to airlines who are publicly traded and/or flag carriers as shown below, with several reginal leaders and multi-billion dollar market caps.

Fleet

Avation executed a number of aircraft sales over the past two years, downsizing from a fleet of near 50 aircraft pre-pandemic. Avation’s fleet is set to grow beyond 2024. Avation has been granted additional purchase rights and now holds purchase rights for a further 24 aircraft with an extended expiry date of June 2034.

The weighted average age and weighted average remaining lease term of the company's fleet was 6.9 years and 4.6 years, respectively. The fleet consisted of narrow-body (52%), turbo-prop (30%), wide-body (18%) aircraft. The aircraft in the company's fleet were manufactured by ATR (18), Airbus (14), and Boeing (1 ). Avation has aircraft orders (2) and purchase rights (28) priced at attractive levels.

Catalyst

2025 year end Refi