Aircraft leasing company AeroCentury (NYSEMKT:ACY) filed for Chapter 11 bankruptcy protections earlier this week. Today, ACY stock is rocketing higher, to the tune of 250%. So what do you need to know right now?
For those unfamiliar, AeroCentury has been around since 1989 and calls Burlingame, California its home. The company primarily leases aircraft and provides financing services to regional airports around the world. ACY stock has, like many other travel names, become a victim of the Covid-19 pandemic.
With that in mind, here is what you need to know about AeroCentury and ACY stock now:
- AeroCentury and its subsidiaries lease aircraft to domestic and foreign carriers.
- It also sells aircraft from its portfolio to other leasing companies, financial services companies and airlines.
- As of March 29, AeroCentury owned 12 aircraft.
- Because of its connection to airline business, AeroCentury said it took a big hit from Covid-19.
- Essentially, a drop in air travel has lowered demand for aircraft from the company.
- Importantly, the pandemic was not the sole cause of pain for AeroCentury.
- As Nicole Bullock wrote for Bloomberg, AeroCentury defaulted on its credit line in 2019.
- The company was supposed to be taking time to shore up its balance sheet, buts its revenue tanked 85% year over year in the third quarter.
- AeroCentury reported that its debt of $125 million dwarfed assets of $121 million in September 2020.
- With all this in mind, AeroCentury filed for Chapter 11 bankruptcy protections in Delaware.
- AeroCentury says that it intends to pay vendors, suppliers and employees in a timely manner. Regarding this, it is looking to maintain the authority to pay its employees first-day relief measures.
- The company has entered into a so-called stalking-horse agreement with its lender, Drake Capital. This means that Drake could potentially acquire its assets directly and resolved any debt.
What to Know as ACY Stock Rockets Higher
So what does this all mean? And why is ACY stock rocketing higher after AeroCentury filed for bankruptcy protections?
Well, investors may appreciate this explanation from InvestorPlace Markets Analyst Tom Yeung:
“In bankruptcies, equity investors can often walk away with stunning returns. The Chapter 11 debt restructuring usually wipes out shareholders — as evidenced by high-profile bank and carmaker failures during the 2008 financial crisis. But in rare occurrences, equity holders are able to negotiate a deal that preserves some of their ownership. A last-minute merger of American Airlines with US Airways in 2013 saw shares jump from 20 cents to $11. And even now, bankrupt car rental firm Hertz is seeing competing offers to bail out stakeholders.
Today, investors might be gambling on the same outcome with ACY stock. Recent mergers [i.e., GE/AerCap] and an improving airline outlook means that even weaker aircraft leasing company shareholders might still get bailed out for management’s past errors.
That said, there are plenty of risks. White-knights are vanishingly rare in Chapter 11 cases, and most courts will wipe out equity and preferred stockholders long before negotiating haircuts with debt holders. Investors in bankrupt companies not only need to believe that the company’s asset value exceeds its liabilities, but that the courts will also recognize that truth.”
If you are considering diving into the ACY stock rally, make sure to keep this advice top of mind.
On the date of publication, Sarah Smith did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Sarah Smith is a Web Content Producer with InvestorPlace.com.
