Aercap is the first company to enter the All in Stocks Portfolio. If you haven’t read my previous write ups, I strongly recommend you to go back and read them:

Aercap: A Fundamental Analysis

Aercap: Q1 2019 results analysis

Aercap: Q2 2019 results analysis

Aercap’s business is a simple one. It raises debt to buy airplanes, mostly from Boeing and Airbus and then leases those airplanes to the airline companies. Yes, I’m aware of the current situation, all the western countries are closing their borders, the USA is likely to shut down all domestic flights and if that happens, the rest of the world is likely to follow their lead. And that’s why the opportunity exists.

In such a situation, one of the most important things an investor should look at is the company’s Balance Sheet. This is the document that tells us what the company owns and what it owes.  Right now, it’s important to understand how long can the company keep going without the need for additional funding, even if a large part of its clients stop paying.   

If you’re not well versed in accounting or finance, here’s a quick lesson. In every corporate structure, there is a concept called seniority. For example, in the case of a bankruptcy, the first entities to get paid are the creditors, those who lend money to the company. These could be banks (if the company has bank loans), investors (in the case the company has issued bonds), or others. Then come the preferred shareholders and only at the end of all this come the shareholders. If, after paying what is owed to the senior entities there’s nothing else left, than the shareholders get nothing. So the lenders are more senior and the shareholders are more junior. (Even between the lenders there are several levels of seniority)

Why am I explaining all of this boring financial stuff? Because this is important to understand Aercap. 

You see, if an airline company gets in trouble (like what is happening right now) do you know who’s the most senior stakeholder in its corporate structure? That’s right, Aercap. Aercap must be paid before all the other lenders and shareholders. 

And what if the airline goes bankrupt? Well, in case of a bailout, guess what is the only thing the company and the government that is bailing it out really can’t afford to lose? Exactly. The airplanes (especially if we’re talking about state airlines). The airplanes are the most important asset an airline company has (have you seen the waiting list for new airplanes over at Boeing and Airbus? We’re talking about years!) and it will default on its debt before defaulting on the lessor (aka Aercap). 

And what if the company isn’t bailed out? Aercap just repossesses its airplanes and delivers them to another client. Yes, there are issues attached to this. Legal issues, logistic issues (like changing the whole cabin to suit another company’s corporate identity, etc), but all of these are manageable. In case you don’t follow the airline industry, just in 2019 alone there were 23 airline bankruptcies. Aercap is used to it. 

This is also a good time for what is called sale-and-leaseback agreements. Airline companies with liquidity issues may sell their airplanes to other, stronger companies, just to lease them back. This way they get a lump sum of cash right away.

Now, although Aercap’s  contracts are Hell or High Water contracts, these airlines will do everything they can to defer payments to Aercap. This is already happening with the Chinese airlines, and Aercap acquiesced. Aengus Kelly, Aercap’s CEO, has said that in such a dire situation he wants to help the Chinese clients and keep them for the next 30 years. I don’t really think Aengus was just being a nice guy. What probably happened was that the Chinese told him “Hey, you have 2 options here: 1st) you allows us to pay these leases later or 2nd) you can forget the chinese market“.

But there are also good news coming from the East. In the slide below, we can see that the air-traffic from, to and inside China is picking up again. It might be too early to get excited about this, but…

Aercap’s share price has been demolished recently, mostly because Mr. Market overreacted by thinking that every single customer of Aercap will go bankrupt. And it’s for that exact same reason that I believe that when it rebounds we could be seeing a multibagger in just a few months. Hard to believe? Don’t take my word for it. 

Although in 2009 Aercap was a different company, we can still draw some parallels.  From July 2007 to March 2009, the share price went down from $32.3 to $2.09. This was a 94% drop. Do you know what happened next? It went up to $13.82 in 1 year. That’s right, thanks to herd behavior and to generalized panicking this was a 7-bagger in just 1 year.