How to Check Avia Solutions Group for Possible Fraud: Guidance for Investors

Over the past week, investment analysts from companies holding Avia Solutions Group (ASG) bonds have contacted me twice, asking for a more detailed explanation of the SmartLynx bankruptcy. Their biggest concern is that the same situation could repeat with other companies within the ASG holding.

In this regard, the BLACKLIST.AERO team has prepared recommendations for Avia Solutions Group investors. In particular, this article explains which parameters in ASG’s activities should be reviewed with aviation compliance specialists in order to either dispel or confirm concerns about a possible fraudulent scheme within Avia Solutions Group.

From a legal perspective, ASG bondholders have even stronger rights than minority shareholders. Bondholders are not co-owners but creditors. Among other things, they have the right—just like minority shareholders—to request documents that clarify not only the nature of the SmartLynx bankruptcy, but also the real situation within the holding as a whole.

Specifically, Avia Solutions Group is obligated to disclose to investors:

• material debt risks

• related-party transactions

• financial risks of its subsidiaries

• factors that may affect the company’s ability to service its debt

• any operations that worsen credit quality

Therefore, the following parameters should be analyzed first, in order to form at least a reasonable understanding of the actual state of the holding you have invested in:

Parameter 1. Solvency of Other Operators Within ASG

It is necessary to request the financial statements of SmartLynx (Australia), Avion Express, Air Explore, BBN Airlines, Magma Aviation, Ascend Airways, and KlasJet regarding overdue leasing payments to ASG, as well as overdue payments to external creditors (maintenance, handling, fuel, hotels, etc.). It is also necessary to analyze the indebtedness of the FL Technics group of companies and the Baltic Ground Service group.

This parameter will show the overall debt burden of the companies within the holding and will provide a starting point for constructing an accurate overall picture.

Parameter 2. ACMI Lease Pricing for Subsidiaries

It is necessary to request ASG’s contracts with SmartLynx (Latvia, Estonia, Malta, Australia), Avion Express, Air Explore, BBN Airlines, Magma Aviation, and Ascend Airways, and compare them with average market ACMI rates for the same aircraft types.

If ASG’s lease rates for these operators do not exceed the market by more than 5–10%, this may indicate reasonable pricing between the parent company and its subsidiaries.

If the rates charged by ASG exceed market prices by 15% or more, this may indicate artificially inflated debt. As a result, significant accounts receivable accumulate, which are later reported as “paper profit”. At the same time, ASG has no obligation to pay taxes on this “profit,” because no actual payments were received and the leasing was not paid.

Parameter 3. Ratio of Aircraft Leased to Subsidiaries vs. External Operators

It is necessary to analyze how many aircraft ASG leases to its subsidiaries and compare the percentage with the number of aircraft leased to external operators. If subsidiaries account for more than 50% of ASG’s leasing business, there is a potential risk of abuse in related-party transactions. The higher the ratio in favor of subsidiaries, the more likely such abuses become.

Parameter 4. Timing of Significant Debt Formation

If ASG knew about:

• the artificial increase of SmartLynx debt

• asset transfers

• intercompany debt structures created to shift obligations

• preparations for default or liquidation of subsidiaries and did not disclose this in the bond prospectus or current reports, this constitutes:

• Material Non-Disclosure

• Misrepresentation

• Breach of Covenant

If Several Parameters Raise Concerns, the Following Model May Emerge:

• Avia Solutions Group acquires charter airlines not to develop flight networks, but to create a “customer base” that will lease aircraft from ASG. This resembles Elon Musk’s situation during Twitter due diligence, where he found an excessively large number of bots. According to Musk, these bots were created to artificially inflate the number of users and increase the value of the asset before sale.

• ASG may be artificially inflating its profit on paper by supplying services at inflated prices to subsidiaries. Most of these services will never be paid for. Yet investors receive financial statements showing attractive numbers that do not correlate with reality.

• The main driver of ASG’s growth is not the success of flight operations, but the success of bond issuance. The company is critically dependent on external borrowing; without it, the entire essence of such a “business” collapses. Therefore, if problems arise with new bond issuance or creditor confidence in existing bonds, the entire structure can collapse like a financial pyramid.

Disclaimer

However, as stated earlier, such conclusions can only be drawn if several of the parameters above point in the same direction. Until a detailed analysis of documents is performed—which can only be requested by shareholders and creditors—it is premature to state that Avia Solutions Group is essentially a fraudulent scheme for stealing creditors’ money.