Mad Retail Muppet – on Aimia debt

Daniel Austin has transitioned to a new site, the Mad Retail Muppet. On his first post in his forays with Aimia’s corporate debt, I am happy to bring his site to your attention.

I’m sure the 10 or 20 human visitors here will find excellent reading on his site.

I’ll add some value by saying:

* Aimia’s 2018 debt matures on January 22, 2018 and will likely mature. Their 2019 debt matures on May 17, 2019 and has a 5.6% coupon. They’re not actively traded via IB, but via Questrade they are currently being asked for at 84 cents (or YTM of 15.3% – noting these are the regular bonds and not the strip bonds). Retail bond pricing typically incorporates a VERY healthy price spread over what should be the existing market price (i.e. an institutional investor would likely get at least a couple cents better pricing, thus a higher YTM).

* The YTM of this debt issue should give you an idea of what I think about the preferred shares, which are trading at a yield of roughly 11% at present (AIM.PR.A/B).

* Taking a $456 capital loss (pre-tax!) on this debt transaction is a very low tuition cost. It’s even less than the cost of a typical 3-credit course at my old university!

* Daniel’s deferred revenue/cost analysis is spot-on: if Aeroplan members go on a Home Capital Group-style bank run on their Aeroplan accounts, Aimia is hard-pressed to pay – such is the perils of investing in a company with a negative tangible equity of some $3.1 billion! This alone is a major reason why I would not touch anything in this corporation’s capital structure.

* It’s obvious Aimia has another choice they will execute on in the future – watering down their rewards pricing. Legally speaking, if they were to double the price of all rewards, what recourse does the consumer have?

Let’s check the terms and conditions

In particular, you acknowledge and accept as a condition of continued membership that:

1. Aeroplan Miles have no monetary value whatsoever and cannot under any circumstances form the basis of a monetary claim against Aeroplan.

5. Aeroplan assumes no liability to members whatsoever by reason of the termination of, or amendment to, the Aeroplan Program, in whole or in part, the addition or deletion of reward partners (including Air Canada), limitations on the availability of flights or seats, changes made by Aeroplan Partners to their terms and conditions, or any change made in accordance with sections 6 to 8 below.

Looks like the program (similar to Air Miles) is an unregulated confidence game – the only recourse Aimia has to watering down their product (or Air Miles) is the loss of consumer confidence. Not much of a remedy.

As a side note, I’m anxiously awaiting my $100 gas gift card in the mail.

18 thoughts on “Mad Retail Muppet – on Aimia debt”

  1. How do you follow these blog post that do not have RSS feed (like Divestor). Do you just check them everyday to see if there’s a new post?

  2. Yes I know….that’s how I follow you…..I worded that poorly. The question still remains.

  3. There used to be a service called page2rss but they closed over a year ago (it isn’t something they could monetize sadly).

  4. consumer has no recourse for any of these loyalty programs. for what it’s worth, the in-house loyalty programs for most airlines are worse than Aeroplan when it comes to availability/pricing/changing the rules. you can see this by simply comparing EBITDA margins on loyalty programs (when they’re disclosed … most airlines don’t want to disclose because they run these things as cash cows).

    Aeroplan will likely find new airline partners. Worst case is probably just that Aeroplan continues to buy airfare from Air Canada but at rates that were higher than what it paid previously. Air Canada has already said it is open to that option. also don’t forget the non-core assets that Aimia can sell.

  5. Hey Sacha,

    Different topic but I’m curious what you decided to do with your GCM.DB.V bonds on the exchange offer?

    I exchanged 40% and kept 60% in Vs.

  6. I did not exchange my Vs either, not because I didn’t want to….because TD Webbroker gave me notice on the 9th, with the due date being the 11th. Sacha why did you not exchange….do you feel that the 2020 has a lot less risk now due to 70% of the debenture being extended to 2024, albeit at a better rate?

  7. @Marc, US$47 million of the debentures were converted into the 2024’s, which is slightly less than half of them outstanding. My reasons for not converting is that it was a borderline decision financially, and the cash sweeps will go to repurchasing 2020’s before they will go to the 2024’s.

  8. 12:53 PM EDT, 05/12/2017 (MT Newswires) — Gran Colombia Gold Corp. (GCM.TO) announced Friday that its consent solicitation process concluded Thursday and holders of 77.4% of the total principal amount of the Company’s issued and outstanding 2020 Debentures consented to the company’s proposal to amend the Amended and Restated Indenture dated as of January 20, 2016, as amended January 1, 2017, to provide holders the option to extend the maturity date of their 2020 Debentures to January 2, 202. In addition, holders of a total of US$47.0 million of 2020 Debentures elected to extend their 2020 Debentures to 2024.

  9. @Marc: Right, 77% of the holders said OK to the extension, but a lot of people (including Safety) decided to only partially exchange them for 2024’s ($47 million worth). Since there’s about US$100 million outstanding it makes the math easy.

  10. It was a tough decision.

    I partially did it for holding period reasons thinking I would probably hold onto the GCM.DB.X until the equity was fairly valued (recognizing that may never happen) so I might as well enjoy the higher coupon but might sell the V’s into the buyback. The YTM was definitely higher for the Vs though all else being equal.

    I also thought the market might reward the GCM.DB.X for the higher current yield. I see many examples in the pref market where the current yield is rewarded over the total return (check FTS.PR.I vs FTS.PR.H for example where they are interconvertible every 5 years).

    I’m curious to see what the BoD and other large debenture holders did with their positions.

  11. Thanks for the clarification Sacha….I should have known better that you would not have gotten your numbers wrong 🙂

  12. @Marc: I do get things wrong sometimes, so don’t assume I’m infallible!

    As a total on-topic side note, I got my gas card from Aeroplan so this is probably more of a return than most Aimia investors have gotten…

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