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Aimia Preferred Shares: Heads I win, Tails I Don't Lose Much
Because dear God am I going nowhere near the common shares
I’ve long been a fan of Canadian preferred shares for the enterprising income investor.
My rules were simple. I’d pay somewhat close attention to the market, buying up distressed prefs (all the cool kids call them prefs) whenever the parent got in a little bit of trouble. You’d lock in an 6-10% return on the dividend alone, along with significant capital appreciation potential when the company inevitably turned itself around.
I did this numerous times, each time making a 20-25% total return, including preferred shares of Cannacord Genuity, TransAlta, and, most importantly for this post, Aimia.
My Aimia (TSX:AIM) preferred share investment came in approximately 2015-16. The parent company was reeling after Air Canada announced they weren’t going to renew the contract for Aeroplan. Aimia would eventually sell the asset back to Air Canada at a firesale price, ensuring enough liquidity to pay the arrears in the company’s preferred shares, which paused the dividend as soon as the bad news hit the market.
I was comforted in knowing Aimia had plenty of other assets, including investments in various loyalty programs around the world, a decent sized cash pile, and a large investment in AeroMexico’s loyalty program.
I had investments in both Aimia’s common shares and its preferred shares. I made enough on the prefs to more than make up what I lost on the common.
Fast forward a few years and Aimia has sold most of its existing assets. Earlier this year, after a significant amount of back and forth, AeroMexico finally purchased Aimia’s stake in the airline’s frequent flyer program, netting the latter approximately $500M in local currency. That happened back in February and closed fairly recently.
Aimia has evolved into essentially a closed-end fund for the Mittleman brothers, who collectively own about 5% of the company. Kudos to those guys, who gained control over a company with approximately $600M worth of cash and virtually zero liabilities with just a small amount of capital out of their own pockets.
Aimia has made some investments with their cash hoard, including a stake in China’s largest outdoor advertiser, some BTB technology company that appears to be heavy on buzzwords and not so heavy on actual results, and, of course, ownership of Mittleman Capital Management, because of course it should own a hedge fund. I don’t think any of these investments actually make any money today.
Needless to say, I don’t have much confidence in Aimia or the brothers who run it. It’s a rudderless ship ran by a second-rate hedge fund wanting to play in the world of grownups, making questionable investments in stuff the rest of the market won’t touch.
There is, however, one saving grace. The preferred shares could be a pretty interesting opportunity here. Let’s take a closer look.
Aimia’s Preferred Shares
As mentioned, Aimia is flush with cash after closing the AeroMexico sale, and putting that capital to work buying back its preferred shares is an absolute no-brainer.
Aimia has two series of preferred shares left. Series 1 trades under the ticker symbol AIM.PR.A and currently yield 6.7%. They have a market cap of $91M with a little over 5M shares outstanding.
The second series is the series 3 preferred shares, which trade under the ticker symbol AIM.PR.C. They also yield 6.7% and have a market cap of $87M.
The bull case is simple. It’s an absolute no-brainer for Aimia to start buying back these preferred shares in a big way. They cost approximately $13M per year in dividend payments. The company has enough cash to buy up both series about three times over. And its attempts to prop up the common shares with buybacks isn’t working.
The inevitable buyback puts a floor under these prefs, meaning the base case is a 6.7% return, plus some upside potential on the yield if both issues reset at a higher rate. Rate resets are scheduled to happen to each issue on March 31st, 2025 and March 31st, 2024, respectively. Higher rates would put even more pressure on the company to start buying back those preferred shares.
The series 3 shares are the play here, at least in this analyst’s opinion. The time to start buying these back is leading into the rate reset, since you’ll have a better idea what the cost is going to be over the next five years. They could do a NCIB to pick up a bunch of shares under the $25 par price, then redeeming the rest at $25 without penalty in March, 2024. They’d then do the same with the Series 1 issue a year later.
The series 3 also resets at a higher rate than the Series 1. The former resets at the 5-year Bank of Canada bond rate plus 4.2%, which currently puts the yield at 7.7% on the $25 par price. The Series 1 pref resets at the current BoC five-year rate plus 3.7%, or at a hair over 7% on the par price.
The return profile is pretty compelling. You’re looking at about 9% on dividends alone. Add in approximately 10% on capital gains and we’re looking at about 19-20% in about a year and a half, or about 12-13% annually. Accompany that with little downside risk here and I like that risk/reward equation.
There are two problems. It’s a no-brainer solution for me. But I don’t think it’s a no-brainer solution for the Mittleman brothers. They’d rather put Aimia’s cash into money-losing nonsense with big upside potential rather than take the easy route and buyback preferred shares. The market obviously agrees with my assessment. That’s why Aimia trades at less than the cash on its balance sheet.
The second problem is liquidity has virtually dried up on the preferred shares. A NCIB could help drum up some sellers, but it’s hard to buy shares if there aren’t any available.
The bottom line
Aimia’s common shares are uninvestable at this point, at least for this analyst. Even if they started paying a dividend.
The preferred shares are a little more interesting, but I just can’t get over the risk of current management doing something I view as extremely misguided. For that reason, I won’t be pursuing the preferred share opportunity. But I wouldn’t be surprised if Aimia moves its buyback muscle to those preferred shares. It makes a lot of sense for the company, especially with potentially higher rates.