Exchange Income slides after targeted by short-seller

Cohodes questions the safety record of airlines, sustainability of dividend

Shares of Exchange Income Corp. fell as much as seven per cent on Wednesday after U.S. short-seller Marc Cohodes revealed that the aerospace and aviation firm is his latest Canadian target.

In a new report, Cohodes questioned the safety record of Exchange Income’s airlines as well as the sustainability of its dividend.

Exchange Income responded, calling the attack a “short and distort campaign” aimed at undermining the value of the company’s shares.

“The short report was deliberately released immediately following the end of the company’s second quarter when EIC is in a quiet period, and is based on a number of statements, assumptions and opinions with which we strenuously disagree,” Exchange Income said in a press release.

Cohodes said the company has increased its debt load by $427 million over the past five years, and issued more than $230 million of shares to fund its roughly $700 million deficit.

“EIF has it all..Hope you enjoy the slides, much more to come…,” Cohodes said in a tweet shortly after his Exchange Income presentation was released.

Exchange Income said it has maintained a consistent strategy since its inception in 2004, which has allowed for a “reliable and growing” dividend for shareholders.

“Nothing has changed,” it said, adding that Exchange Income has paid shareholders $300 million in dividends since 2004, and maintained a strong balance sheet with limited leverage. “EIC reiterates its expectation that the company will meet analyst consensus for the 2017 fiscal year.”

Winnipeg-based Exchange Income is an acquisition-oriented company and parent of 13 subsidiaries that operate in the aviation and manufacturing sectors. They include Perimeter, which provides flight and cargo services into northern Manitoba from Winnipeg, Keewatin Air, which provides medevac services from northern Manitoba and Nunavut into Winnipeg, Calm Air, which provides flights from Winnipeg into northern Manitoba and Nunavut, and Bearskin, which provides flight and cargo services in Manitoba and northwestern Ontario.

Cohodes, a former managing general partner at hedge fund Copper River Management, has also been involved in public campaigns against Home Capital Group Inc., Badger Daylighting Ltd., Valeant Pharmaceuticals International Inc. and other Canadian companies.

Exchange Income and Transport Canada did not respond to requests for comment.

David Tyerman, an analyst at Cormark Securities, disagreed with two of Cohodes’ financial concerns: that Exchange Income’s dividend is not covered by cash flows, and that the valuation of the company’s cash flows implies a much lower valuation than the current share price.

“We think these concerns are unfounded,” Tyerman said in a research report.

He said his analysis shows Exchange Income’s dividend is safely covered, assuming that it is paid out of free cash from existing operations and that growth investments are financed using new debt and equity. “We note that new investments generate additional cash flows for new and existing investors,” Tyerman said, adding that these investments have enabled the company to increase its dividend 12 times in 12 years at an average annual rate of 5.8 per cent.

The short report ... is based on a number of statements, assumptions and opinions with which we strenuously disagree.