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I imagine this has been tried before, but I went ahead and asked Bloomberg to spit out a list of profitable small cap companies trading at a discount to book value where insiders are buying shares on the open market.  I came across a helicopter company with significant oil & gas exposure.  Ugh.  That figures.

Right as I was about to move on to the next cigar butt I noticed the company at hand had some bonds outstanding.   These bonds mature in 6 years and are sporting a 11% ytm.  Given what’s out there right now an 11% ytm usually comes with a hairy situation and a long duration.  That doesn’t seem to be the case here as there are plenty of marketable assets covering these bonds and I think this will work itself out in just a few years.  However, I know what the bond market is thinking - there have been genuinely scary events in helicopter land recently (discussed later).   

So, I recommend buying some ERA Group bonds that mature in the year 2022.  They are part of a $144 million debt issue that is junior to $114 million in other debt.  But that’s it.  $258 million is all the debt encumbering $800+ million worth of helicopters (book value).  Despite $44 oil and diminished drilling activity in the gulf, the company is earning money and an insider is buying shares.  They just signed another contract with the government (their largest client, 10+% of revenue in past but more now, 5 year contract).  The stock popped 20% on the government contract news and the bonds didn’t budge.

This is a balance sheet investment idea.  Their assets are marketable, liquid investments – in helicopters.   Their core business is flying the helicopters but they appear to buy & sell helicopters like horse traders trade horses.   They’ve sold four so far this year (in excess of book value).  You can look on various websites and see them for sale… used prices ranging from $500k to $15 million.    You can get a pretty good idea what each is worth.   Here’s my go at it:

So, I can see $600 million in assets by matching model numbers from ERA website with various other websites that list choppers for sale.  The face value of their total debt is $258 million.   They have $150 million in committed capital for new helicopters over the next few years but all of that is cancelable except for $25 million.

Why is the bond market so scared?

Scary Event #1:  The H225 helicopter model (on the books at $167 million, in my estimate at $126 million) recently was involved in a fatal accident by another helicopter operator in another country.    The helicopter model has been grounded as the air-safety folks say there is no current way to detect “imminent failure” of the questionable part (gearbox).  To be conservative you can chop that from the fair value of the assets.  I think that’s being too conservative as there are 180 of these helicopters in existence and it seems that Airbus is coming out with a solution to make them operable again.  That’s $2.8 billion in choppers of their newest model… Airbus can’t just blow that off.  The H225 that Era owns are only 6 years old (average age). 

Scary Event #2:  CHC group filed for bk on May 5, 2016.    CHC is a competitor and has about 50% more helicopters than ERA (many H225s).   

Positive events:

ERA has been buying back long term debt and has plenty of cash ($39 million)

ERA has the strongest balance sheet in the industry

ERA just signed a government contract that is utilizing over 18% of the fleet.

Pilot chat rooms & ERA website says “they’re hiring.”

My $605 million estimate is too conservative.  Maybe even their book value ($800 million) is conservative.  They’ve been realizing gains on the disposition of assets in recent past.  Helicopters have a 30-year useful life but they use 15-year depreciation.  Average age of their fleet is 12.

I don’t think we’ll have to wait the entire 6 years for payoff… once we get within a few years of maturity and the industry settles down, these bonds will trade at 5% ytm, and at that price you’re looking at a 40% total return (including coupons) for a 3 year holding period.    In a worst case scenario, if oil drops to $20 and they never drill another gulf well this company is still years away from a liquidity crisis.   If that is the path ahead of us you will get a couple of coupons and eventually end up with equity in a new helicopter liquidation business.

I’ve been reading about these helicopters and have found that these helicopters can be used for other things.  Even better, helicopters tend to hold their value over time:

http://www.ascendworldwide.com/2014/03/what-factors-influence-helicopter-values.html

ERA Group is selling helicopters to deal with liquidity, solvency and new orders:

http://www.controller.com/listings/aircraft/for-sale/list/?manu=AGUSTA&mdltxt=AW139

This is a hostage situation -  Equity holders aren’t going to give the bond holders the helicopters.   Drones are cool but they can’t carry 16 passengers from 1 side of LA to the other in just 10 minutes during rush hour traffic.

Catalyst

coupons & time