GRPAF - Alta Fox Capital - Grupo Aeroméxico: Relative Merit Of Credit Opportunities Versus Large-Cap 'Generals'
2023-11-04 05:35:00 ET
Summary
- Alta Fox has allocated a portion of its portfolio to larger market cap businesses for diversification and lower risk.
- The firm has found opportunities in the credit market to achieve a similar return profile with less risk.
- Grupo Aeroméxico SAB's secured bonds offer an attractive yield, short duration credit, and significant downside protection.
The following segment was excerpted from this fund letter.
Grupo Aeroméxico, S.A.B. de C.V. ( GRPAF )
Despite being small-cap focused, there has always been an allocation in the Alta Fox portfolio reserved for “generals,” which are larger market caps and “best in breed” businesses. Even though the expected IRR of the generals category tends to be lower than our “gems,” they are worthy portfolio candidates due to the diversification benefit and lower risk profile.
However, given the recent strength in some of these generals alongside much higher interest rates, Alta Fox is finding opportunities to produce a similar return profile with less risk via the credit market. Grupo Aeroméxico SAB is a good example of our selective approach to credit given its off-the-run nature, attractive yield in a high-quality business, short duration credit, and significant downside protection.
Grupo Aeroméxico SAB 8.50% 3/17/27 Secured Bonds
Alta Fox purchased secured bonds in Grupo Aeroméxico SAB, Aeroméxico, at an average cost of 90 in July 2023 (the latest price is 93/94). We believe from this basis that we could earn a 13.5% yield if bonds are refinanced one year early and 12.3% YTM (11.8% and 11.0%, respectively, from latest mid-point price).
In our view, that risk/reward profile is attractive as it likely beats equity benchmarks from here and has significantly less risk. This opportunity exists because the bonds are an under the radar, private credit opportunity in a company that recently emerged from bankruptcy with earnings momentum and an upcoming U.S. IPO.
Aeroméxico, the flagship carrier of Mexico, filed bankruptcy on June 30, 2020, in the U.S. and exited on March 17, 2022. It is the leading Mexican airline in terms of fleet size and network. Aeroméxico is a founding member of the SkyTeam Alliance and has a strategic partnership with Delta.
The company filed for bankruptcy due to struggles with COVID and used the bankruptcy process to cut costs, rationalize its fleet, extinguish debt (from over 4x pre-filing to under 2x forward EBITDAR), and renegotiate leases. In addition, low-cost peer Interjet ceased operations during COVID and liquidated. The bonds were structured during COVID to ensure over-collateralization in the event of a tepid post COVID recovery.
They benefit from a strong collateral package that includes cash, the loyalty points program, real estate, jets and airline slots. It is our belief the collateral fully covers the bonds with ample excess asset coverage. The company’s business is robust, with EBITDAR surpassing chapter 11 projections.
Furthermore, Mexico has been upgraded to category 1 air travel with the US allowing further earning expansion. Aeroméxico has been buying back bonds in the open market, reducing the $762.5MM principal to $662.5MM ahead of a planned U.S. IPO by year-end 2023 / early 2024.
Our base case is redemption of the bonds at par when they go current (3/17/2026) for a current 11.8% YTM rather than at maturity (3/17/27). The bonds benefit from strong call protection, 104.25 at 3/14/24 and 102.125 at 3/17/25; providing further upside if they are called prior to 3/17/26.
| Alta Fox Capital Management, LLC (“Alta Fox”) is an investment adviser to funds that are in the business of buying and selling securities and other financial instruments. This information is provided for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell an interest in a private fund or any other security. An offer or solicitation of an investment in a private fund will only be made to accredited investors pursuant to a private placement memorandum and associated documents. Alta Fox may change its views about or its investment positions in any of the securities mentioned in this document at any time, for any reason or no reason. Alta Fox may buy, sell, or otherwise change the form or substance of any of its investments. Alta Fox disclaims any obligation to notify the market of any such changes. The Alta Fox Opportunities Fund’s Net Return figures (“Alta Fox Net Return”) reflect the hypothetical USD investment performance of an LP in the Alta Fox Opportunities Fund that has participated in all Special and Private investments, and are net of all Fund related expenses, a 2% management fee, and 20% performance fee. Net returns will vary by share class. 2023 returns are unaudited but have been verified by the Fund’s administrator. Each partner will receive individual statements showing returns from the Partnerships’ administrator. The Alta Fox Opportunities Fund’s Gross Return figures (“Alta Fox Gross Return”) reflect the USD investment performance of a share class subject to all Fund related expenses but are gross of any management fee and performance fee. 2023 performance returns are estimated pending the year-end audit. Past performance is not indicative of future results. Actual returns may differ from the returns presented. References to net exposure and attribution data are internally calculated estimates and could be subject to errors. The S&P 500 and Russell 2000 are U.S. equity indices. The S&P 500 Index is one of the most commonly used benchmarks for the overall U.S. stock market, and it tracks the average performance of 500 widely held stocks including industrial, transportation, financial, and utility stocks. The composition of the S&P 500 is flexible and the number of issues in each sector varies over time. Since the Fund invests across a wide universe of companies and stocks, we provide the S&P 500’s returns as a measure for investors to compare the Fund’s returns to broader market performance. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true smallcap opportunity set. Since Alta Fox’s research process typically leads us to opportunities in the smallcap space, we provide the Russell 2000’s returns as a measure for investors to compare the Fund’s returns to broader small-cap performance. These indices’ returns are included for informational and comparative purposes only and may not be representative of the type of investments made by the Fund. Reference to an index does not imply that the Fund will achieve returns, volatility, or other results similar to the index. The Fund’s portfolios are less diversified than these indices. These indices’ returns are total returns which include dividends and do not reflect the deduction of any fees or expenses which would reduce returns. An investment in the Fund/partnership is speculative and involves a high degree of risk. Opportunities for withdrawal/redemption and transferability of interests are restricted, so investors may not have access to capital when it is needed. There is no secondary market for the interests, and none is expected to develop. The portfolio is under the sole trading authority of the general partner. A portion of the trades executed may take place on non-U.S. exchanges. Leverage may be employed in the portfolio, which can make investment performance volatile. An investor should not make an investment unless the investor is prepared to lose all or a substantial portion of its investment. 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Alta Fox Capital - Grupo Aeroméxico: Relative Merit Of Credit Opportunities Versus Large-Cap 'Generals'