I wrote a response to an interesting discussion re general UK stock debt level kicked off by kalkanite (https://www.stockopedia.com/content/the-mass-misallocation-of-capital-303808/?submitted=15#15).

I'm interested in AA views so have copied and pasted here for anyone else interested in AA. Here goes....

AA has been on my radar since latter part of 2017. My work on it is really light so far so not very informed and interested in in feedback. I think an interesting opportunity may emerge out of short term pain.

My view is that AA is a great business with a bad capital structure. This is interesting and could lead to opportunity for me. Margins are very high. This is as it sells reassurance as much as actual real product. I see the move to electric vehicles over time as an opportunity to sell its very high margin reassurance brand and do even less than it does now!

My near term outlook on AA is that a financial event is very likely imminent (IMO inevitable) under the stewardship of new CEO Simon Breakwell (explained below).

The options:

1) meaningfully dilutive equity issuance
2) debt for equity swap
3) Take private / takeover
4) Dividend suspension

4 is an absolute certainty IMO. Its only worth £50m retained cash but Breakwell needs it to fund growth strategies for the business. Look at his past (founded and grew Expedia and then developed Uber Europe) and it is easy to see that this is a guy you have as CEO to grow and develop the business and not run it as sparsely as possible just to pay back bondholders. Paying back bondholders is a necessity and he will try and grow to do it rather than prune and shrink. He needs the £50m to invest...and I am not sure on the debt covenants (haven't done that level of work) but the firm is obviously fearful of breaching them and must be too close for comfort. so they need to make extra room in cash flow to make investments.

On to option 2. I don't think the PE firms that IPOed AA are bondholders so its all new money (nearly all the debt was issued in 2013). That means that debt for equity is not likely, at least not without…

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