Investment trust insider on bombed out funds – James Carthew: two of six 2020 disasters may yet fly
Many investment companies have dived in value this year. You could probably predict some of the list of the worst-performing share prices: Infrastructure India (IIP), whose main asset is a ports business which has seen a dramatic slump in business ever since Wuhan went into lockdown, and Riverstone Energy (RSE), where many of its oil shale investments must be staring bankruptcy in the face.
DP Aircraft (DPA) is the third worst-performing stock in my list. Its shares are trading at 17.5 cents, Morningstar estimates that the net asset value (NAV) is 95.2 cents. It owns four Boeing 787s, two of which are leased to Norwegian and two leased to Thai Airways.
Norwegian has stopped paying its lease payments, a situation that could have serious repercussions for DPA, given that it still has significant bank borrowings to service. Norwegian is seeking state aid and the government has agreed to provide loan guarantees, but various commentators were asking questions of Norwegian’s business model ahead of the crisis. Should governments bail out companies that might have got into difficulties anyway?
Thai Airways, which has grounded most of its aircraft, is said to be looking at sales and leasebacks of more of its fleet as a way of freeing up much-needed liquidity. Reason dictates that they won’t default on DPA’s leases if they want to get this done.
DPA’s bank finance has been provided by two German banks, DekaBank and NordLB. The NordLB loans were used to finance the Norwegian planes and are secured against those two planes (as a package) and similarly, the DekaBank loans were used to purchase the Thai Airways planes. If Norwegian goes bust but Thai Airways is ok, DPA’s NAV will roughly halve. That’s assuming it has nothing left over after the planes are sold – and that will depend on the market for second-hand planes at the time. It would still be on more than a 60% discount.
In the meantime, DPA has decided to suspend its dividend. It says that it is talking to its banks and, in the current environment, I would expect the banks to be lenient. Amedeo Air Plus Four (AA4), which also leases plans to Thai Airways, has followed suit today.
Next on the list is Chelverton UK Dividend (SDV). Its split capital structure has amplified the fall in the market, the ordinary shares are geared 76% by its zero dividend preference shares. The trust was out of favour even ahead of the pandemic because of its small company focus.
One of the great things about having gearing in the form of zeros is…
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