You may have seen this ... excerpt from an article summarizing the transaction. Pretty sloppy writing, so I'd take it with a grain of salt for now.
If this deal goes ahead, analysts suggest that the sale of the aircraft would improve FLY Leasing’s (if the company is assumed to be one of the BBAM affiliates mentioned in the presale reports from S&P and Fitch, which Wells Fargo analysts Gary S. Liebowitz, believes is the case) book value/share and reduce its aircraft remarketing risk, says Liebowitz. He assumes the ECAF fleet may include around $0.7B of FLY aircraft and that the sale of that fleet could “generate a book gain of about $75M – i.e., adding around $1.50 to book value per share. Also, we believe that if a large portion of FLY’s fleet is sold at a premium to book value, the stock’s current P/B multiple (a group-low 0.82x) becomes even more difficult to justify”.
What U.S. based lessor? There aren't any meaningful U.S. based lessors to my knowledge. Because nobody would establish an airline leasing company in the world's highest tax jurisdiction.
There are a couple reasons that a private deal may not work. One, a private deal may trigger repayment (change of control) conditions in some of the debt docs, and the refi costs or cost of new debt may not be attractive. Two, and more significant, is the management contract with BBAM. If a private buyer took FLY private, it would have to take the BBAM contract "as is," which apparently is not attractive to the market -- hence FLY trading at such a material discount to book, unlike its peers. Because the BBAM contract is not attractive to the market, it's very unlikely that it would be more attractive to a private buyer.
If a buyer wanted to terminate the BBAM contract, that would likely be very costly. So a go-private deal is not an easy solution ... all FLY's issues point back to the BBAM contract.
Okay, they borrow money at a lower cost. But is the benefit of that lower cost debt worth the dilution to shareholders from the stock offering? Remember, FLY/BBAM's historical position was that "shares are trading at a significant discount to fair value / market value." But if you issue new shares at an even bigger discount than the market discount, what does that say about your credibility?
Anyway, water under the bridge. But you can't just look at one side of the transaction (lower cost of debt) without the other (significant dilution of existing shareholders).
Amen to that.
However, karma is a b!tch, and Onex may get hoisted on its own petard. Onex will need liquidity at some point, both with respect to BBAM and FLY. Onex knows that it cannot dump FLY shares into a market that does not support the "outsourced management" model. If FLY would actually start repurchasing shares, it might drive up the PPS to a point that Onex could exit. But that seems unlikely, given past actions.
Watch out for a "sweetheart" deal where Onex sells its $11.41 shares back to FLY at a premium. They'll argue that FLY couldn't purchase the shares in the market without extraordinary transaction costs, blah blah blah. And watch BBAM take an origination fee for "arranging" the buyback. Hopefully not, but wouldn't shock me given the July 2013 stock offering foolishness.
I'm late to the party here! Good to see "old timers," meaning suffering long-term FLY shareholders.
- I agree that Q2 sounds mediocre ... the results are highly sensitive to End of Lease revenue.
- The new "Return on Equity" calc seems pretty silly. Seems like it will bounce around from quarter to quarter, depending on End of Lease revenue in that quarter.
- I agree with others that, although FLY *should be* repurchasing shares, it very likely *will not* repurchase shares.
- On that note, however, remember that Onex was provided with a sweetheart deal to purchase ~ $25m in FLY shares at $11.41 in Dec 2012. Onex is going to need liquidity from its investment in BBAM/FLY at some point. I wouldn't shocked if FLY uses the repurchase authority to repurchase some of the Onex shares ... and I wouldn't be shocked if FLY pays a sweetheart "premium" ... sell low, buy high, seems to be the principle underlying the July 2013 stock offering.
- Despite the mediocre Q2, FLY is still one of my largest positions. BBAM is rationally chipping away at the cost of capital. Zissis is one of the most seasoned players in the industry. BBAM is trying to "highgrade" FLY's portfolio, shortening aircraft lives and extending lease terms. All good.
- I didn't find the accounting explanation too concerning. FLY is (finally) selling some aircraft below book value. They are accelerating depreciation of those aircraft, sort of like an impairment.
Good luck all
No, Jordan Cove is the other one ... see my post below from Apr 28. Jordan Cove is running ahead of Oregon LNG from a permitting perspective. Also, I think that Canada may have at least one terminal under development in British Columbia. But I've been focused on the U.S. facilities.
A quick supplemental comment because I'm looking at the list.
The six permitted LNG export facilities that are expected to ramp up by 2020 are:
- Sabine Pass (3 Bcf/day)
- Freeport (1.9 Bcf/day)
- Cove Point (0.8 Bcf/day)
- Cameron (1.8 Bcf/day)
- Corpus Christi (1.2 Bcf/day)
- Lake Charles (0.6 Bcf/day)
9.5 Bcf/day total. All on the Gulf Coast, except for Cove Point in Maryland. As I mentioned yesterday, the other West Coast facility would be Jordan Cove ... that would be the main "competitor" for Oregon LNG. But this is midstream energy / toll road model. Either the Asian customers will commit to purchase the gas ... or they won't build the "toll roads."
Jordan Cove, which is being developed by Veresen out of Canada, is ahead of LUK/Oregon LNG in the same geographic area. FERC is supposed to issue its EIS to Jordan Cove on June 12 (delayed from February 27).
There are a handful of LNG export facilities on the Gulf Coast and East Coast.
As I've posted before, there are two big questions here. One, does current and forward pricing of natgas/LNG incentivize Asian customers to commit to long-term contracts? There are some huge LNG export facilities currently under development in Australia and elsewhere in the South Pacific. But Asian customers may want geographic supply diversity -- or maybe not.
Two, are customers going to take LUK seriously, when it is competing against developers that actually operate in this space? The fundamentals could be favorable, but potential customers may be leery of signing up with a "newbie" in such a complex industry (complex from a commercial perspective and also complex from a political navigation perspective). Who is the commercial partner here?
But potential for a home run.
Some news last week on the Oregon LNG project. You can search google news for more.
"The Federal Energy Regulatory Commission (FERC) has issued its notice of schedule for environmental review of Oregon LNG’s Warrenton, Oregon bi-directional terminal. The notice also covers the Oregon Pipeline connector project and the upgrade of a portion of the Williams Company pipeline in Washington State.
The notice set 12 February 2016 as the date of issuance of the final environmental impact statement, and 12 May 2016 as the 90-day Federal authorization decision deadline. These dates represent the final steps in the FERC approval process.
Oregon LNG’s terminal in Oregon would be a US$6.3 billion construction project that would provide 3000 jobs during construction, and 150 permanent family-wage jobs when operational. Oregon LNG has agreed to use unionized labor for construction, while preserving a certain percentage of contracts for local and minority-owned businesses. Once in service, the facility will pay about $60 million annually in state property taxes."
I had to refresh ... LUK already received DOE approval. So FERC approval is the biggest of the regulatory gating items. However, a big question mark is whether Oregon LNG can lock down sufficient long-term contracts to finance the project and move into construction (in 2016/2017). If so, this could be another home run for LUK. (Grand slam? Maybe ... depends on marketing success.)
I'll have to read it at some point. But exec comp has been out of kilter at LUK for years.
#4 in particular sounds crazy. Again, I'll have to read it. Are you saying that 50% of 2015 LUK bonuses will be based on PTBI (pre-tax book income) of the opcos ex JEF? How does that make any sense whatsoever? The LUK execs are not running the opcos -- they are running JEF, in anything. The various opcos all have their own management teams. The LUK execs are merely overseeing the opcos at a Board level. The performance of the opcos shouldn't have much, if any, impact on LUK exec bonuses.
Hopefully something got lost in translation, or that's just plain stupid.
Summary from seekingalpha:
- FQ1 (ending Feb. 28) earnings of $11.682M plunged from $112.432M a year earlier on revenue of $591.67M down from $899M.
- Fixed income revenue of $126M fell from $285.9M a year ago. Investment banking revenue of $272M fell from $414.3M. Capital markets revenue of $140M fell from $267.8M.
- Bright spot: Equities revenue rose to $203.5M from $158.4M.
- CEO Richard Handler: "We experienced a slow first quarter due to a tepid fixed income trading market and fewer new issues in leveraged finance capital markets."
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I've said it before. Senior managers (Handler et al) need to slim down the conglomerate model, sell the random "legacy" LUK investments, and focus on Jefferies and related businesses. For example, I can understand an asset-management platform. I can understand "capital in a pinch," e.g., FXCM. I don't understand why LUK retains plastics, lumber, etc.
I haven't read the full press release ... later today.
In a perfect world, FLY should have cut the divi to $0 and balanced its cash generation among (1) purchasing aircraft and (2) repurchasing shares. #2 (share repurchases) would have been materially accretive to existing shareholders, because FLY has traded so far below book value.
Unfortunately, we all know about the dilutive stock offering etc. So now my view is that FLY should just keep plugging away with its dividend policy, and actually should start growing its dividend conservatively. Say, by 3-4% annually.
If you go read the Aercap view on capital allocation, AER management is following the balanced 1-2 policy that I outline. Although in the latest CC, they paid lip service to the possibility of initiating a dividend. Actually, for AER, a dividend makes sense -- because AER is trading above BV. Whereas, for FLY, a dividend is a sub-optimal way to "pay" shareholders -- a share repurchase program would be accretive and more optimal.
Fair point, but are you considering (i) unrestricted cash and (ii) operating cash flow? Between (i) and (ii), seems like FLY can easily add $750m at a 3 to 1 ratio (roughly $188m of cash/equity and $562m of debt financing).
Also, FLY will be organically de-leveraging as it uses cash flow from the original portfolio to pay down secured debt. I don't see debt-equity being a big issue in practice. But fair to raise it. I'm also cold on any debt covenants, but my fuzzy recollection was that there isn't anything troubling with covs.
Good luck all
Agree with you ... CC transcript was "uninspiring."
- CEO/BBAM figurehead observed: "[W]e expect to continue to fund our 2015 growth program from existing cash, internally generated funds, and targeted loan facilities." That's good news for shareholders concerned about another dilutive SO.
- Good news on fleet metrics. Avg age down from 9.4 (2012) to 7.8 years (2014); avg lease term up from 3.2 (2012) to 5.3 years (2014). The trend will continue ... FLY is selling eight more vintage 757s this year (16.5 years old at expected closing date).
- 2015 acquisition target ~ $750m ... 2014 was ~ $950m, surpassing 15% growth target.
- During 2014, sold eight aircraft (avg age 12.6 years) for total gain $19m over NBV.
- Q1 2015 guidance ... lease rev $102-105m plus min $10m end of lease revs [that would be down sequentially] ... depreciation ~ $50m; interest ~ $40m; G&A has been running ~ $10m ... sounds like net income will be sequentially lower compared to Q4
- From earnings ... book value/share is now $18.32.
- FLY's cost of debt continues to improve. FLY conservatively swapped its floating-rate debt against its lease terms. So FLY hasn't benefited from lower interest rates to the same extent as certain of its peers. But now those leases are maturing, and the swaps are rolling off. So FLY can benefit from lower interest rates as it remarkets the aircraft and repositions the capital structure.
Another article [part 2]:
Reimer said he could not emphasize the cost enough. "Most people talk about the development phase maybe costing $40 million or $50 million," he said. "I think at the end of the day, that is understated significantly. These projects, in my own experience — they are several hundred million [dollars]. There are some efficiencies and maybe some time improvements that have taken place as more companies have gone through this process, [so now] maybe it's $100 million, but it's not an insignificant amount.
"And now what's happened is the [U.S. Department of Energy] is requiring that you go through the complete FERC technical and environmental review process before they are going to grant you authority to export to a non-free-trade country," Reimer said. "These are just difficult, difficult projects."
A punishing proving ground
Reimer said he sees a landscape of LNG export projects that have been approved by FERC and the DOE that together have a natural gas export capacity of roughly 9 Bcf/d to 10 Bcf/d. Another group of projects representing about 10 Bcf/d of gas "is probable in the LNG space," he said. The companies in the probable category have LNG experience and either have their own source of gas or provide their own offtake and buyers, or have a strong customer base.
"So these projects in total are probably about 20 Bcf/d of gas," Reimer said. "These are projects that I give a high probability of coming to market between 2015 through about 2022."
An LNG plant takes about four years to build after it gets its federal construction approvals, Reimer observed. "The process to get to that point is tedious and expensive," he said. "Freeport LNG got serious about LNG exports in late 2010. We have spent years '11, '12, '13 and '14 and several hundred million dollars getting ourselves to the point of being able to construct."
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Another article [part 1]: Export costs will prove too much for smaller, later projects, LNG veteran says
U.S. LNG export projects that are not among the top 10 are going to have a tough time making it, especially as most of the early projects expand their export capacity through additional projects, a veteran LNG executive said recently.
"These projects are very expensive," Charles Reimer said on a Feb. 27 Morgan Stanley conference call on the LNG market. "They require a significant corporate balance sheet, or they require an unbelievably good financing team. … But you're going to need all of that to put these projects in the queue and then be able to get them to [a final investment decision]."
This could spell trouble for LNG export projects in early development. "With the projects we're involved with," Reimer said, "we're quite comfortable with our cost structure, we're quite comfortable with the time frame we're doing these in, we're quite comfortable with the [engineering, procurement and construction] contract, because we've negotiated prices on those."
"The projects that are two years out — that is not as clear to me," he said.
Reimer was president and COO of Freeport LNG Development LP from 2002 to 2014, and he now advises the Freeport LNG CEO. He is also a former president and CEO of Cheniere Energy Inc. He began his career with Exxon Co. USA in 1967. Reimer recalled a 2000 meeting with Charif Souki, now the chairman and CEO of Cheniere, describing Souki as "quite a visionary."
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