Want to hear about a fascinatingly quirky situation in a dusty corner of UK micro-cap land?
A closed-end fund but think of it like a bond: over the next 4 years your capital is returned to you with an 9% yield - plus the keys to 7x A380s you'll be given for free.
A closed-end fund but think of it like a bond: over the next 4 years your capital is returned to you with an 9% yield - plus the keys to 7x A380s you'll be given for free.
It's a CEF called Doric Nimrod 2 (#DNA2) - there are three of them but this one seems the most interesting.
Long story short, they raised debt and equity, bought 7 A380s and leased them all to Emirates and these are coming off lease over the next 2-4 years, owned free and clear.
Long story short, they raised debt and equity, bought 7 A380s and leased them all to Emirates and these are coming off lease over the next 2-4 years, owned free and clear.
You can buy DNA for 56p and get at least** 76.5p of payments.
The leases are structured to provide for DNA2 to pay investors a total 4.5p over 17 remaining quarters while servicing the debt on each aircraft so they're returned unencumbered and paid for.
(4.5p paid since report)
The leases are structured to provide for DNA2 to pay investors a total 4.5p over 17 remaining quarters while servicing the debt on each aircraft so they're returned unencumbered and paid for.
(4.5p paid since report)
Please excuse my Microsoft Paint skills.
Blue line is share price. Red diagonal line is the value of remaining return of capital + yield at each point in time.
The green area is therefore the implied value of the aircraft - which is today negative along with the income.
Blue line is share price. Red diagonal line is the value of remaining return of capital + yield at each point in time.
The green area is therefore the implied value of the aircraft - which is today negative along with the income.
There two are very good reasons for this:
The 380 was a white elephant anyway and C19 is only accelerating its demise; airlines are mothballing them day after day.
Income comes from a single customer, asset base is a single aircraft type.
But is it too pessimistic a valuation?
The 380 was a white elephant anyway and C19 is only accelerating its demise; airlines are mothballing them day after day.
Income comes from a single customer, asset base is a single aircraft type.
But is it too pessimistic a valuation?
"The Board.. confirms that it has received no formal request from Emirates to renegotiate their leases and that they are currently servicing them in line with their obligations"
If happy with Emirates as a counterparty, here's where you stand now:
If happy with Emirates as a counterparty, here's where you stand now:
There are 2 more points to make about the leases:
**They're 10+2 years, emirates can extend after 10 years for a further two at lower rates. If they do not, they must pay the two years' lower rates immediately. To be conservative, I assume this is already in the 81/76p
**They're 10+2 years, emirates can extend after 10 years for a further two at lower rates. If they do not, they must pay the two years' lower rates immediately. To be conservative, I assume this is already in the 81/76p
Secondly, at the end of each lease emirates can purchase the aircraft. I doubt they will and we'll look at what they're worth as scrap but hey, you're not paying for it at 56p so here's the March appraisal of the fleet: $762M extra, or £2+ per share, a free 1000-1 call option.
Scrap and parts. Remember, this is highly decremental: the more planes grounded, the less flying aircraft = greater supply of parts commensurate with less demand.
Tim Clark of Emirates in September
flightglobal.com/fleets/emirate…
Tim Clark of Emirates in September
flightglobal.com/fleets/emirate…
The landing gear is worth a few million each.
Simpleflying, this week. The engines are worth a few million per aircraft.
simpleflying.com/airbus-a380-sc…
Simpleflying, this week. The engines are worth a few million per aircraft.
simpleflying.com/airbus-a380-sc…
What's in the price today?
Emirates will probably stop paying you. They certainly won't buy them and would rather un-defer all their deferred deliveries. Nobody else will take them on. You'll have to scrap them and you'll have to pay for the privilege.
Anything else is upside
Emirates will probably stop paying you. They certainly won't buy them and would rather un-defer all their deferred deliveries. Nobody else will take them on. You'll have to scrap them and you'll have to pay for the privilege.
Anything else is upside
For another explanation of the situation here's an old post from OTC Adventures on DNA1 which I recalled when looking for possible upside on travel reopening - although the post is as it was in 2018 and on DNA1, rather than 2 its a good explainer.
otcadventures.com/?p=1996
otcadventures.com/?p=1996
