Air Transport Services Group (ATSG) is planning to launch $350 million of convertible senior notes due 2029 in a private offering under Rule 144A. ATSG also expects to grant the initial purchasers of the notes a 30-day option to purchase up to an additional $50 million of notes.
The notes will be senior, unsecured obligations of ATSG, that will accrue interest payable semi-annually in arrears and will mature on August 15, 2029, unless earlier repurchased, redeemed or converted. Noteholders will have the right to convert their notes in “certain circumstances and during specified periods”. ATSG will settle conversions in cash and, if applicable, shares of its common stock. The notes will be redeemable, in whole or in part, for cash at ATSG’s option at any time on or after August 15, 2026.
The interest rate, initial conversion rate and other terms of the notes will be determined at the pricing of the offering.
ATSG expects to use a portion of the net proceeds from the offering to repurchase shares of its common stock concurrently with the pricing of the offering in privately negotiated transactions effected through one of the initial purchasers of the notes and to repurchase shares of its common stock from Amazon.com under an existing agreement.
ATSG also plans to use a portion of the net proceeds from the offering to repurchase approximately $200 million aggregate principal amount of its outstanding 1.125% convertible senior notes due 2024. ATSG intends to use the remainder of the net proceeds for fees and expenses and to repay a portion of the outstanding borrowings under its revolving credit facility and for general corporate purposes.
In connection with issuing the 2024 notes, ATSG entered into convertible note hedge transactions and warrant transactions with certain financial institutions. In connection with ATSG’s intended repurchase of the 2024 notes, ATSG expects to enter into agreements with the existing option counterparties to terminate a portion of such existing call spread transactions. In connection with any action, existing option counterparties may sell shares of ATSG’s common stock in the open market or in secondary market transactions, and/or enter into or unwind various derivative transactions. ATSG warns that such action could reduce the market value of the stock.
ATSG announced its second quarter results last week. The aircraft lessor reported a 4% uplift in revenue to $529 million and a 13% decline in adjusted pretax earnings of $58 million for the quarter ended June 30, 2023. Adjusted earnings per share (EPS) was $0.57 compared to $0.59 in the year-ago quarter.
ATSG’s operating expenses rose 5% compared to a year ago, with salaries, wages and benefits also up by 5%. Maintenance, materials and repairs were up by 28% with fuel down by 8%. Interest expense rose by 75% due to a combination of higher debt balances and higher interest rates.
Rich Corrado, president and chief executive officer of ATSG, attributed the growth in revenue to the ACMI segment, which reported a 10% year-on-year gain to $24 million in the second quarter – a $26 million improvement from the first quarter.
“Our results in the second quarter reflect a rebound from the first quarter in our passenger airline operations, including both improved revenues and cost efficiencies, and the benefit of 13 more Boeing 767-300 freighters in service at June 30 this year versus a year ago,” he said. “Adjusted EBITDA was in-line with the prior year period, despite continuing inflationary effects on our operations versus the second quarter of 2022. We remain confident in executing our plan to lease nineteen newly converted freighters in 2023, including nine leased to date. We continue to expect attractive returns on what we now project will be $785 million in 2023 capital spending, down $65 million compared with prior guidance.”
ATSG’s aircraft leasing segment, CAM, reported a slight uplift in revenues by 2% even though pre-tax earnings were down. The lessor had leased more 767-300 freighters, and accepted scheduled returns of several 767-200s over the prior 12 months. “We expect a record pace of new freighter lease deployments in the second half, including six already delivered this quarter,” said Corrado on an earnings call. As a result, ATSG has maintained its full year adjusted EBITDA guidance and have raised its adjusted EPS guidance range by $0.10 from the targets set in May, it has lowered its CapEx guidance for this year by $65 million to reflect fewer aircraft purchases for 2024 conversion and fewer-than-planned overhauls for engines for the 767-200 freighters. Corrado said that these reductions would have a “positive impact” on this year's cash flows.
ATSG has decreased its capital spending projection for 2023 by $65 million to $785 million, including $240 million in sustaining capex and $545 million for growth. The decrease in growth capex principally reflects two fewer A321 aircraft purchases this year for conversion in 2024. Lower sustaining capex reflects fewer than planned overhauls of engines for Boeing 767-200 freighters.
Corrado noted that the fundamental driver of midsize freighter leasing - rapid fulfilment of e-commerce purchases via air express networks - will persist over the long term.
“Global e-commerce growth projections remain strong, and our owned fleet and conversion pipeline stand ready to meet future demand, further supported by the need to replace aging, less fuel-efficient aircraft over the next decade," he said. "Our freighters, including Boeing 767s, Airbus A321s, and Airbus A330s, remain the most efficient and reliable solutions for these markets.”
Corrado finished by saying, “Capital investments in 2024 are now expected to be lower than 2023 levels. That gives us the option to pursue other capital allocation alternatives that may yield even better returns for shareholders.”