This is a tough environment.

The topic boards on VIC have recently headers that warm a value investors heart including:

Crypto

Aswath Damodaran says value investing needs to be "reinvented to gain new life."

What do you think has no fundamental downside even in a bad economy? 5 yr horizon

Stagflation Is Coming

I will skip most of the macro as it has been done before but U.S. markets are at all-time highs and yields at all-time lows; deficits soaring …well….this isn’t easy.

In December last year I wrote up BKEP pref; it has been a long and volatile  ride but if you held it for 1 year you have made a 15.5% yield (in a market that has hated everything in the MLP space). Safe yield is loved.

I think I have another one that should offer a strong double digit return with investors. Most of my ideas that tend to have better risk adjusted returns have a credit angle and this one is no different.

FTAI preferreds are a good place to hide with 20%+ upside and a history of insider buying (Management and the BoD  had been buying prefs during the drop in the mid-teens). Further we know how this performed in one of the worst aviation and energy markets in history (we are in it).

Yes I know this was written up by Smarkeu in 11/16 but that is best part about it. I am a wimp. Historically if I like an idea as a write up and can find a double digit yielding idea further up the cap stack I would rather size up the investment and feel like I have a larger margin of safety; and If I can make a high teens return…well nobody ever complains about that.  Further these prefs have a bit of an inflation hedge and other protections built in (Change of control increase in rate that is not traditional to prefs) so if the Fed decides to ever raise rates aggressively again you can get some protection.

Instead of re-writing the whole thesis on FTAI; I would rather focus the margin of safety you have before you are impaired on the investment.

The common has rallied to all time highs; if the prefs, simply  trade back to par + coupon it is a ~19% rate of return.

I will focus on the “B”s for this analysis. These have an 8% coupon but will reset to 3 month libor + 644.7 bps starting in 2025 (Note: The A’s have a higher spread). Where will LIBOR be? Heck if I know but if inflation is coming I will bet higher; if inflation isn’t coming well; earning a 645 bps spread for a safe asset is probably not a bad place to be because with all of this deficit spending and low rates if we haven’t seen inflation than spreads just will have to contract in all asset classes…by a lot.

Lets build it up from the bottom in reverse to figure out how much Earnings need to drop for our dividend to not be covered. There is an ATM facility outstanding right now on the prefs so lets assume a few more get issued, use the current debt stack and point to the company’s guidance for next year for Aviation only; subtract out SG&A and use an implied steady state capex number based on annualized aviation D&A. I will add in the Jefferson current run-rate EBITDA and provide no other additional value and you are still covered on your distribution by 1.2x.

This gives no value to LMT opportunity; no value to the EBITDA uplift in Jefferson which is imminent or a myriad of other assets. Or any value of the $119mm in cash on the company’s balance sheet which will be reinvested in more aviation assets.

Another way to think about it is book value. This is a hard asset business, and call me old fashion but I think book value does matter in a business like this, specifically when the company is both building assets (so no EBITDA on books associated with large spending) and part of their business is recycling assets from older to newer vintage.

Using the above chart there is about $1bb in equity beneath the preferreds, however stripping out approximately $145mm of intangibles and other; you are down to about $800mm of subordinate capital and asset write-downs needed.

However for all the fun and ideas isn’t it all about the charts?

With the equity at all time highs it seems like a matter of time until the preferreds catch up again leading to a 20% + return. I don’t see how the prefs can stay here with the common rallying.

Risks:

1)  The company has been tapping an ATM to continue to raise capital which has kept the share price lower; I have factored in some continued share issuance but I would hope with the equity at all time highs the management team will move towards issuing more common versus preferreds.

2)  It is a Fortress backed company, not a great history there