March 25, 2020 - 8:20pm EST by
2020 2021
Price: 54.50 EPS 0 0
Shares Out. (in M): 173 P/E 0 0
Market Cap (in $M): 111 P/FCF 0 0
Net Debt (in $M): 317 EBIT 0 0
TEV (in $M): 428 TEV/EBIT 0 0

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Long DNA2

All numbers are given in USD unless otherwise stated


Doric Nimrod Air Two offers an interesting risk-reward which gives a pretty certain return of almost 50 percent (48.6% percent to be precise at the current price) over a period of a little less than 5 years. If this is not yet enough for you, there is an added kicker at the end of this 4 year and 7 month period which can fluctuate, but I assume will range somewhere between 50% and 300%.

Doric Nimrod 2 was launched in 2011 with the specific goal of acquiring A380 Aircraft partly funded by debt and partly by equity, and lease them on a long term leases to large carriers.

They ended up acquiring 7 A380 aircraft and leased all of these on 10 + 2 year leases to Emirates. The lease has a 10 year fixed term, after which there is a 2 year extension, at a lower rate. If the lessor decides to terminate the lease after the 10 year term, a termination payment equivalent to the present value of the rent is due.

The acquisitions are done quite smartly to protect unitholders. They took on 1,030 million USD in debt and the balance was paid by issuing 172.75 million shares at 2 pound each for 345.5 million pound of equity. This all combined to 7 times the 234 million acquisition cost of the aircraft. The debt was almost all fixed rate, and the small amount which wasn’t has an interest rate swap to mimic a fixed rate.

To avoid any difficulties in this currency combination, the lease payments are split up proportionately in dollar and sterling payments. The dollar lease payments are earmarked for the interest payments on the debt and the debt amortization, while the sterling lease payments are utilized to pay the dividend. Because the company has to report in sterling, all dollar fluctuations go to the bottom line and makes the income statement quite erratic.

The payments are thus that all the debt has been repaid at the end of the lease terms (all the debt is even repaid after the 10 year lease term it appears).

At the current price, Doric Nimrod Two yields a 37.5% dividend yield (18 pence a year, 4.5 pence a quarter). Over the remaining life of the leases, shareholders are to receive dividends totaling 81 pence vs the current share price of 54.5 pence.

If the lease isn’t extended for 2 years at the end of the 10 year period, the return would be even greater given the termination payment in the contract.

The largest risk to the dividend payments thus is counterparty risk. I would consider this risk to be quite low given that Emirates is part of a holding company which is quite profitable providing all sorts of aviation services. In addition, given the backing of Emirates by the royal family I would be very surprised if they would not support the company if they would get into any financial difficulties.

In a worst case scenario (say Emirates declares bankruptcy in 1.5 years) you will still get close to 50 cents on the dollar of your purchase price in dividends and end up with these aircraft with de minimis amounts of debt against those assets. Such a scenario would be quite improbable in most circumstances I guess. But if it can be a consolation, in a world where Emirates would declare bankruptcy within this 2 year timeframe, asset values will have gone down a lot more over a 2 year timeframe I assume.


The kicker payment

The biggest unknown with an investment in Doric Nimrod Air Two are the kicker payments at the end of the lease period. Upon expiration of the lease, the lessee has the option to purchase the aircraft at an average price of 3 independent appraisals. If Emirates does not take up the purchase of these aircraft, Doric Nimrod has the option to sell these aircraft to whomever they want. This is where it would become quite difficult to determine the kicker payment.

The A380 has been a problem child from the get-go and valuations are falling dramatically. With Qantas, Singapore Airlines and Air France ditching most of their A380’s, it looks like the market for this aircraft will be quite bad going forward. This is off-course the reason that the units of Doric Nimrod trade so badly (Corona doesn’t help).

One challenge is that there are very few transactions for the A380. One sale was to Portuguese wet-lease carrier Hi Fly, which hasn’t been a success so far (Hi Fly has been unable to find a long term taker for its Airbus). A more recent transaction (February 2020) was the sale of 2 A-380’s by Amedeo Air Four Plus to Etihad, but which is probably somewhat optimistic given the young age of the aircraft sold (around 3 years old). The 2 planes were also sold to the lessee of these aircraft.

For the purpose of this write-up I will just assume that trying to guess what the future value of these aircraft will be is close to impossible. A lot will depend on the future actions of Emirates given it’s very large market share in these aircraft. At the current market price however, you are getting these 7 aircraft at the end of the lease for free. But to put the current market cap of 94 million pound into context, this means less than 14 million pound per A-380 at the end of the lease.

To give you some indications about the upside at the end of the lease period. Dr. Peters, another fund which is the owner of the earliest Singapore Airline frames (which have been returned after just 10 years), has leased the engines back to Rolls Royce for ‘at least’ 480,000 per month for the 4 engines (or somewhat more than 5 million dollars a year). The sale of parts from 2 A380’s by Dr. Peters since the expiration of the leases in 2017 has been 19 million per aircraft. It is anticipated that prices of A380 parts will fall going forward due to the stripping of retired aircraft, but if they receive just 5 million dollars in parts per aircraft (arguably a very reasonable amount), this will net Doric Nimrod 2 at least 20 pence a share (or close to 30% of the current share price). It has to be noted that the proceeds of these sales will be purely upside above the current 10% a year return.

One benefit of flooding the the market with second hand parts is the lower operating cost of the aircraft. Given that around 20% of airline operating expenses are maintenance material and rents/depreciation, the A-380 could become more competitive going forward just because it is out of favor.

The low acquisition price of aircraft going off lease could become an opportunity to convert some in cargo planes. There was extensive interest during the design phase for the A380 in cargo form, but due to ongoing delays these orders were cancelled. I would stress however that there is very little knowledge as of this moment over the possibility of converting A380 aircraft to a cargo plane configuration.

To conclude, the role which Emirates will play for the future of these aircraft will determine in large part the outcome of this investment.

The alert investor will notice that there are 3 Doric Nimrod entities with A380’s as asset backing. This write-up focused on DNA2 because this one has the largest discount to the expected future dividends. DNA 1 trades at a decent premium to the expected future dividends, which is one of the reasons I avoided that one.

The other one, DNA3 has just 4 leased A380 aircraft which is probably better than the 7 aircraft in DNA2, but they will come on the market after the DNA2 aircraft, and all in a period of 3 months (as opposed to DNA 2, where 2 aircraft will be released one year earlier, after which the other 5 aircraft will be released in less than 2 months’ time). While 5 aircraft in 2 months’ time is a large part of the market, these will at least be released before the 4 aircraft from DNA3. So if these would create a glut in the market, they have a one year head start to get (parts) sold.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


* Emirates not going bankrupt

* Continued Dividend payments

* Just wait 4 years and 7 months

* A380's sold at decent prices

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