Our goal is to present to you our IPO analysis for every new fixed-income security that enters the market and to find out if there is any trading potential. In this article, we want to shed light on the newest trust preferred stock issued by Air T Funding, a statutory business trust formed by Air T Inc (AIRT). Even though the product may not be of interest to us and our financial objectives, it definitely is worth taking a look at.
The difference between the ordinary preferred stocks and the trust preferred stocks is that the latter offers a company the advantage of paying tax-deductible interest on the debt securities of the trust while they are somehow able to ignore the existence of the trust’s debt on their balance sheet. Another important thing here is that the trust preferred’s debentures generally rank senior to the company’s traditional preferred stocks.
The New Issue
This is not the typical IPO of preferred stock as the newly issued Trust Preferred Stock is a result of a distribution of 8.4M warrants for the purchase 8M shares of Alpha Income Trust Preferred Securities (AIRTP). In addition, Air T Inc has distributed 1.6M trust preferreds (also called “Capital Securities” in the prospectus provided below) as a dividend. The total of 8.4M warrants entitles the holder to purchase one share of AIRTP for $2.40, at any time until the expiration date June 7, 2020. Furthermore, the warrants are transferable and are currently trading under the ticker symbol “AIRTW”. In the terms of this warrants offering, the 8.4M warrants for 8.4M Trust Preferred Shares with $2.50 face value are outstanding for gross proceeds of $21M in total.
You can find some relevant information about the new issue in the table below:
Air T Funding 8.00% Alpha Income Trust Preferred Securities Due 2049 (NASDAQ: AIRTP) pays a fixed dividend at a rate of 8.00% and, unlike all fixed-income securities, has a par value of $2.50. The new trust preferred stock is not rated by the Standard & Poor’s, is callable as of 06/17/2024 and is maturing on 06/07/2049. Currently, AIRTP trades close its par value at a price of $2.40, has an 8.36% yield-to-maturity and a 9.01% yield-to-call. The dividends paid by the new issue are not eligible for the preferential 15-20% tax rate on dividends. They are also not eligible for the dividend received deduction for corporate holders. This means that the “qualified equivalent” YTM and YTC would be 6.97% and 7.51%, respectively.
Here is how the stock’s YTC curve looks like right now:
Air T, Inc., incorporated on November 17, 1980, is a holding company. The Company operates through five segments: overnight air cargo, ground equipment sales, ground support services, printing equipment and maintenance, and leasing. The overnight air cargo segment, which consists of the Company’s Mountain Air Cargo, Inc. (NYSE:MAC) and CSA Air, Inc. (NASDAQ:CSA) subsidiaries, operates in the air express delivery services industry. MAC and CSA operate and maintain Cessna Caravan, ATR-42 and ATR-72 aircraft that fly daily small-package cargo routes throughout the eastern United States, upper Midwest and the Caribbean.
The ground equipment sales segment, which consists of the Company’s Global Ground Support, LLC (GGS) subsidiary, manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the United States military and industrial customers. GGS is located in Olathe, Kansas. GGS manufactures, sells and services aircraft deicers and other specialized equipment on a worldwide basis. GGS manufactures over five basic models of mobile deicing equipment with capacities ranging from 700 to 2,800 gallons. GGS also offers fixed-pedestal-mounted deicers.
The ground support services segment, which consists of the Company’s Global Aviation Services, LLC (NYSE:GAS) subsidiary, provides ground support equipment maintenance and facilities maintenance services to domestic airlines and aviation service providers. The printing equipment and maintenance segment consists of Delphax Technologies, Inc. (Delphax) and its subsidiaries. Delphax designs, manufactures and sells advanced digital print production equipment, maintenance contracts, spare parts, supplies and consumable items for these systems. The equipment is sold through Delphax and its subsidiaries located in Canada, the United Kingdom and France. The Company’s leasing segment, which consists of its Air T Global Leasing, LLC subsidiary, provides funding for equipment leasing transactions.
Source: Reuters.com | Air T, Inc
Below, you can see a price chart of the common stock, AIRT.
The common stock behavior the past year and a half is quite volatile, which can be explained in part from the little shares outstanding, only 2M, and the extremely low average daily volume of only 2,000 shares(!) per day. Contemporaneously, with the current offering, the company has distributed 1.6M “Capital Securities” with a face value of $2.50, which as an absolute value translates into $4M dividend expenses paid in stock. For comparison, the yearly dividend for the newly issued trust preferred stock of the company is around $1.68M.
In addition, with a market capitalization of around $52M, AIRTP is the second smallest company in the “Air Delivery & Freight Services” sector (according to Finviz.com)
Below you can see a snapshot of Air T Inc’s capital structure as of the time of its last quarterly filing in December 2018. You also can see how the capital structure evolved historically.
Source: Morningstar.com | Company’s Balance Sheet
As of Q4 2018, AIRT had total debt of $66M ranking senior to the newly issued trust preferred stock. The new security rank is junior to all outstanding and future senior and subordinated debt and equal to the other trust preferred stocks of the company. At the moment, AIRTP is the only trust preferred stock, issued by Air T Inc.
All Trust Preferred Stocks (also known as hybrid securities)
There aren’t any other securities issued by the company and any other issues in the sector. The last preferred stock was RLGT-A, issued by Radiant Logistics (RLGT) and called in December 2018.
This is why I’ll compare the new IPO with all other trust preferreds listed on a national exchange, which totals 16 issues:
- By Years-to-Call and Yield-to-Call
Almost all of the securities are trading with a call risk. I know it’s not sustainable but I want to compare the group is by their Yield-to-Best (equal to their Yield-to-Maturity). For this purpose, I’ll leave only the stocks with stated maturity.
- By Years-to-Maturity and Yield-to-Maturity
The Junior Subordinated Debentures are redeemable prior to maturity at the option of the Company (NYSE:I) on or after June 7, 2024, in whole at any time or in part from time to time, or (II) at any time, in whole (but not in part), upon the occurrence and during the continuance of a Tax Event or an Investment Company Event or Capital Treatment Event, in each case at a redemption price equal to 100% of the principal amount of the Junior Subordinated Debentures so redeemed, together with any accrued but unpaid interest to the date fixed for redemption.
Source: 424B1 Filing by Air T Funding
Use of Proceeds
The proceeds to Air T Funding from the sale of the Capital Securities offered hereby upon exercise of the Warrants will be invested by Air T Funding in the Junior Subordinated Debentures of the Company. The Company intends to use the net proceeds from the issuance of the Junior Subordinated Debentures for general corporate purposes, which may include without limitation possible future acquisitions, funding investments in, or extension of credit to, the Company’s subsidiaries, repayment of maturing obligations and redemption of securities. Neither the Company nor Air T Funding will receive any proceeds from the initial issuance and distribution of Warrants, which are being distributed as a dividend not in exchange for any value.
Source: 424B1 Filing by Air T Funding
Addition To The iShares Preferred And Income Securities ETF
With the current market capitalization of only $21M, AIRTP cannot be an addition to the iShares Preferred and Income Securities ETF (NASDAQ: PFF), which is important to us due to its influence on the behavior of all fixed-income securities. I’ll just remind you about the last year rally in the fixed-income borne from the redemption of the two “giants” HSEA and HSEB and the released cash of over $600M used from PFF to buy more of the rest of its holdings.
As fixed-income traders, we follow every one preferred stock or baby bond, which is listed on the stock exchange. As such, AIRTP is no exception, and the homework we always do we share it with the public. It is not necessary for the IPO to be an arbitrage and a bargain, but in many cases, the new security happens to be better than the ones already trading on the market.
At first look, the trust security gives a nice return, a Yield-to-Worst of 8.30%. However, the dividend paid by this issue is not-qualified meaning that the qualified equivalent is at 7%. The company is quite leveraged, having 3x more debt than equity and the common stock cannot provide good monitoring of the company. Furthermore, there are not enough comparisons to the new IPO to find a place on the Yield curve. At last but not least, the low price of AIRTP can have a negative effect. This means that at the current discount of 10 cents (the current market price is $2.40) means a loss of 4%. Generally, I will avoid an initial position in the new trust security.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.