Vought Aircraft was working on a big project with Boeing. Vought Aircraft executives, however, spooked investors by admitting they were financially overwhelmed by the contractual obligation. But Third Avenue saw potential gold in discounted notes.
"There was an opportunity when we looked into it when the first lien bank debt was trading at 82 cents on the dollar and the senior unsecured notes were trading at 66 cents," says Michael Fineman, a Third Avenue senior research analyst.
Both, he adds, represented fat yields to maturity. Third Avenue was also drawn to Vought Aircraft because it had a virtual franchise. It was the sole supplier of many aircraft parts, unlike the auto industry, where there is competition among parts suppliers.
Vought Aircraft was the supplier of structures and systems in the Boeing 787 Dreamliner's aft fuselage section. "Vought Aircraft was in a very strong position," Fineman says.
So why didn't others see that?
Investors were scared. They questioned whether the Boeing 787 Dreamliner project, which has been beset with delays, would take off. But Third Avenue officials insisted there was a good reason to buy. They were convinced the company's fundamentals, especially its debt profile, were good.
"Its bank debt was covered over 200% and we found the senior unsecured notes were probably worth 90% of their par amount outstanding," Fineman says. The optimistic outlook was not just based on the 787 Dreamliner, he adds.
"To the extent that the 787 platform became something real and significant for Boeing and Vought Aircraft, there would be significant upside," Fineman says.
The upside became a reality on July 7, when Boeing agreed to pay Vought Aircraft $580 million for its North Charleston, S.C., plant.
Using the fulcrum security or senior debt, Barse explains, meant shareholders got the maximum shot at Vought's upside and the minimum exposure to things going wrong.