If you are going to become a registered holder to try to prevent an involuntary delisting, usually worth moving over at least >201 shares to preclude any reverse share split cash-out shenanigans!!!
Look at $TTSH holders of record history for reference….
How do you think of the value of the business if they renewal? Some considerations:
1. Under current aircraft fleet, the contract should be priced materially lower, no? the invested capital is very low (lower than in 2017) and should be reflected in negotiations with UAL.
2. The most likely case seems to be to renewal with commitment to upgrade the fleet to larger planes. How should excess cash be treated in this scenario? Isn’t it going towards “rebuilding” the business?
3. Lastly, I think that’s not easy to dislodge them on renewal (fleet availability and personnel, for instance). How do you think about that?
Been looking into this further. Keep in mind I'm not a lawyer so am just interpreting the legalese.
- Cash balance and Aircraft Note terms: I believe most of the cash is held at the AWIS level, and cannot be distributed up to the HRBR parentco. In the Dec 2018 A&R agreement, sec 6.08 Restricted Payments states no cash (other than some minor exceptions) can be distributed until the Notes have been fully repaid. Even if the Notes are secured by the specific aircraft/engines/etc, if the Notes are not fully repaid then any security shortfall will still be an obligation that - if left unpaid - will cause a cross-default/acceleration. I don't believe the pre-2018 A&R agreement had any Restricted Payments, which is probably why the lender was forced to take a loss.
- Deferred revenues/contract liabilities: I believe this should be treated as a true liability in a liquidation. The CPA's Oct 2020 amendment addresses "Deferred Obligations" which I believe (difficult to tell exactly though) is AWIS' deferred revenues/contract liabilities. The CPA amendment states the Deferred Obligations shall bear interest, be unsecured, "be absolute and unconditional and not be subject to any offset and (V) shall be paid in full on February 28, 2023 (or before such date if United so elects in its sole discretion)". The original 2017 CPA also prevents AWIS from paying dividends if it results in its cash balance falling below the Cash Threshold Amount (sec 10.19) but the exact amount/formula is not disclosed. So the cash will be subject to all potential claims against AWIS, which includes at least some of the deferred revenues/contract liabilities.
IMO you'd need to deduct at least some of the Other Rent from your FCF, because at least some of these costs include opex-like expenses (ie, "flight training simulator rental expense").
Partially offsetting these, I think there's a typo in your liquidation proceeds - your starting 30Sept2021 CRJ-200 proceeds are $40k/plane instead of $400k/plane, so your 2023 plane values should be $16m instead of $1.6m.
I get a 2023 undiscounted liquidation NAV of ~$1.50-$1.60/share (ignoring any wind-up costs). Maybe still not a bad bet as your other 2 upside cases seem reasonable to me and based on your very good DD it does seem like they have no intention of throwing in the towel just yet...but I do think there is some downside at the current price.
The "Deferred Obligations" section in the Oct 2020 CPA refers to the LT Notes Receivable held by AirWis. They are payments accrued by United to AirWis: "...United shall accrue a payment obligation to Contractor..."
Thus, the following description that you quoted refers to those LT Notes: "be absolute and unconditional and not be subject to any offset and (V) shall be paid in full on February 28, 2023 (or before such date if United so elects in its sole discretion)." This language gives me confidence that the LT Notes will be fully collected in Feb '23.
In regard to AirWis's deferred revenues, management stated that they "determined, using a significant amount of judgement, that from an accounting perspective, a new performance obligation was created." The specification/use of the phrase, "from an accounting perspective," seems to imply that the obligation is more of an accounting formality than an operational obligation, especially considering that the payments that created the obligation were fixed.
I take your points on how note receivables and deferred revenues are treated in a liquidation, but wouldn't UAL argue to the judge that Air Wisconsin didn't fulfill their obligations under the CPA agreement, etc to try getting out of paying the full note amount? The 10-K does state that HRBR's management is "using a significant amount of judgement" in determining the CPA amendment meant UAL was paying (using a cost + margin method) Air Wisconsin to "stand ready to deliver flight services" which seems to be their basis for recognizing the note receivable - maybe I'm missing something, but it seems unlikely that 100% of the note receivable will be collectible with 0% deferred revenue offset in a liquidation.
Anyway, wondering if you can elaborate on a few things:
- Can you share your assumptions (specifically the 3 big cost line items: payroll, expensed aircraft maintenance, and purchased services) to get to your $40-60m FCF estimate? As travel ramps up, wouldn't there also be a big NWC drag as the deferred revenue balance declines?
- 10-Q/K state the CPA and Air Wisconsin's Aircraft Notes have some restrictions on how much cash can be distributed up to the HRBR parentco - have you been able to find out what these restrictions are/have a sense of how much cash and marketable securities are held at the HRBR parent? Per the 10-K, all the Aircraft Notes are non-recourse to the HRBR parent, so if they can pull a lot of capital out of the subsidiary level it dramatically simplifies the downside scenario.
First point: no comment other than let's see, both of us are speculating.
FCF:
270 rev
-127 payroll (vs 127 2019, flex up or down given pilot shortage vs permanent covid cost cutting)
-60 maint (vs 57 2019 given older planes but they weren't used much during covid)
-23 purchased svc (vs 23 2019)
=60 EBITDAR which you can flex up or down depending on above
-12 maint capex (comparable to precovid quarters, which you can also flex down if you believe they're winding down the biz in 2023)
=48 FCF base case
Doing a simple ebitdar-capex here. nwc is even since note receivable declines with deferred rev. Also if you really want to be precise they're significantly overdepreciating for tax benefits, so it's a bit more hairy but again the cashflow isn't the biggest component in the liquidation case so I didn't bother with the false precision. Just a big NAV shell with many upside call options for me.
Third question: according to the CA it's secured by aircraft, engine, parts only i.e. not cash, non-recourse. Also the lender is the Canadian sovereign government, who has historically been lax especially compared to a financial lender. Specifically, HRBR had a restructuring in 2018 with the same lender and 70% of principal + interest was forgiven. Not to say that this is something to count on, but it's certainly there.
If you are going to become a registered holder to try to prevent an involuntary delisting, usually worth moving over at least >201 shares to preclude any reverse share split cash-out shenanigans!!!
Look at $TTSH holders of record history for reference….
What's your base case now that a 5-year contract has been signed? Thanks!
How do you think of the value of the business if they renewal? Some considerations:
1. Under current aircraft fleet, the contract should be priced materially lower, no? the invested capital is very low (lower than in 2017) and should be reflected in negotiations with UAL.
2. The most likely case seems to be to renewal with commitment to upgrade the fleet to larger planes. How should excess cash be treated in this scenario? Isn’t it going towards “rebuilding” the business?
3. Lastly, I think that’s not easy to dislodge them on renewal (fleet availability and personnel, for instance). How do you think about that?
Been looking into this further. Keep in mind I'm not a lawyer so am just interpreting the legalese.
- Cash balance and Aircraft Note terms: I believe most of the cash is held at the AWIS level, and cannot be distributed up to the HRBR parentco. In the Dec 2018 A&R agreement, sec 6.08 Restricted Payments states no cash (other than some minor exceptions) can be distributed until the Notes have been fully repaid. Even if the Notes are secured by the specific aircraft/engines/etc, if the Notes are not fully repaid then any security shortfall will still be an obligation that - if left unpaid - will cause a cross-default/acceleration. I don't believe the pre-2018 A&R agreement had any Restricted Payments, which is probably why the lender was forced to take a loss.
- Deferred revenues/contract liabilities: I believe this should be treated as a true liability in a liquidation. The CPA's Oct 2020 amendment addresses "Deferred Obligations" which I believe (difficult to tell exactly though) is AWIS' deferred revenues/contract liabilities. The CPA amendment states the Deferred Obligations shall bear interest, be unsecured, "be absolute and unconditional and not be subject to any offset and (V) shall be paid in full on February 28, 2023 (or before such date if United so elects in its sole discretion)". The original 2017 CPA also prevents AWIS from paying dividends if it results in its cash balance falling below the Cash Threshold Amount (sec 10.19) but the exact amount/formula is not disclosed. So the cash will be subject to all potential claims against AWIS, which includes at least some of the deferred revenues/contract liabilities.
IMO you'd need to deduct at least some of the Other Rent from your FCF, because at least some of these costs include opex-like expenses (ie, "flight training simulator rental expense").
Partially offsetting these, I think there's a typo in your liquidation proceeds - your starting 30Sept2021 CRJ-200 proceeds are $40k/plane instead of $400k/plane, so your 2023 plane values should be $16m instead of $1.6m.
I get a 2023 undiscounted liquidation NAV of ~$1.50-$1.60/share (ignoring any wind-up costs). Maybe still not a bad bet as your other 2 upside cases seem reasonable to me and based on your very good DD it does seem like they have no intention of throwing in the towel just yet...but I do think there is some downside at the current price.
The "Deferred Obligations" section in the Oct 2020 CPA refers to the LT Notes Receivable held by AirWis. They are payments accrued by United to AirWis: "...United shall accrue a payment obligation to Contractor..."
Thus, the following description that you quoted refers to those LT Notes: "be absolute and unconditional and not be subject to any offset and (V) shall be paid in full on February 28, 2023 (or before such date if United so elects in its sole discretion)." This language gives me confidence that the LT Notes will be fully collected in Feb '23.
In regard to AirWis's deferred revenues, management stated that they "determined, using a significant amount of judgement, that from an accounting perspective, a new performance obligation was created." The specification/use of the phrase, "from an accounting perspective," seems to imply that the obligation is more of an accounting formality than an operational obligation, especially considering that the payments that created the obligation were fixed.
Yes I just re-read it again and you are right - sloppy reading by me, so thanks for looking into it!
I take your points on how note receivables and deferred revenues are treated in a liquidation, but wouldn't UAL argue to the judge that Air Wisconsin didn't fulfill their obligations under the CPA agreement, etc to try getting out of paying the full note amount? The 10-K does state that HRBR's management is "using a significant amount of judgement" in determining the CPA amendment meant UAL was paying (using a cost + margin method) Air Wisconsin to "stand ready to deliver flight services" which seems to be their basis for recognizing the note receivable - maybe I'm missing something, but it seems unlikely that 100% of the note receivable will be collectible with 0% deferred revenue offset in a liquidation.
Anyway, wondering if you can elaborate on a few things:
- Can you share your assumptions (specifically the 3 big cost line items: payroll, expensed aircraft maintenance, and purchased services) to get to your $40-60m FCF estimate? As travel ramps up, wouldn't there also be a big NWC drag as the deferred revenue balance declines?
- 10-Q/K state the CPA and Air Wisconsin's Aircraft Notes have some restrictions on how much cash can be distributed up to the HRBR parentco - have you been able to find out what these restrictions are/have a sense of how much cash and marketable securities are held at the HRBR parent? Per the 10-K, all the Aircraft Notes are non-recourse to the HRBR parent, so if they can pull a lot of capital out of the subsidiary level it dramatically simplifies the downside scenario.
First point: no comment other than let's see, both of us are speculating.
FCF:
270 rev
-127 payroll (vs 127 2019, flex up or down given pilot shortage vs permanent covid cost cutting)
-60 maint (vs 57 2019 given older planes but they weren't used much during covid)
-23 purchased svc (vs 23 2019)
=60 EBITDAR which you can flex up or down depending on above
-12 maint capex (comparable to precovid quarters, which you can also flex down if you believe they're winding down the biz in 2023)
=48 FCF base case
Doing a simple ebitdar-capex here. nwc is even since note receivable declines with deferred rev. Also if you really want to be precise they're significantly overdepreciating for tax benefits, so it's a bit more hairy but again the cashflow isn't the biggest component in the liquidation case so I didn't bother with the false precision. Just a big NAV shell with many upside call options for me.
Third question: according to the CA it's secured by aircraft, engine, parts only i.e. not cash, non-recourse. Also the lender is the Canadian sovereign government, who has historically been lax especially compared to a financial lender. Specifically, HRBR had a restructuring in 2018 with the same lender and 70% of principal + interest was forgiven. Not to say that this is something to count on, but it's certainly there.
Thanks for your answers!