Sept 12 – Fitch Ratings has completed a peer review of five rated large
equipment lessors, resulting in the affirmation of the long-term Issuer Default
Ratings (IDRs) of International Lease Finance Corp. (ILFC), AerCap Holdings N.V.
(AER), Aviation Capital Group (ACG), BOC Aviation Pte Ltd (BOC Aviation) and
GATX Corp (GATX).
All of the ratings have been affirmed. Company-specific rating rationales are
described below, and a full list of rating actions is provided at the end of
this release. The Rating Outlook for all issuers is Stable.
Long-term credit fundamentals in the aircraft leasing industry are being
supported by a number of factors, including growth in global air travel demand,
capital constraints among the world’s airlines, and the aircraft technology
replacement cycle. Despite near-term risks in the airline operating environment
(particularly in Europe) and threats to the global economy, Fitch expects
lessors to benefit from longer term growth opportunities and improved access to
capital as the structure of the industry evolves.
Improved access to capital, particularly in the unsecured debt market, is
supporting the growth plans of both incumbents and new entrants in the global
aircraft leasing market. Many stand-alone aircraft lessors have improved their
leverage profile over the last several years in an effort to diversify funding
sources. However, certain areas of the debt market, such as securitization, have
remained dormant since the 2008 crisis.
While long-term trends are favorable, aircraft lessors continue to face some
near-term issues. Market values and lease rates on some popular aircraft models
(such as A320s) remain soft, which has affected profitability of some issuers.
The low interest rate environment has put pressure on lease rate factors, which
tend to stay fixed for a number of years for many lessors. The lack of growth in
the global economy as well as uncertainty in Eurozone countries will continue to
impact the airline industry. The price of fuel, which remains elevated, is also
likely to continue pressuring airlines’ profit margins.
International Lease Finance Corporation:
The affirmation of ILFC’s ratings and Stable Outlook are supported by the
company’s sizeable market position, funding diversity including a meaningful
unsecured debt component and a demonstrated ability to generate a stable level
of cash flow through multiple cycles. The ratings are restrained by a lack of
profitability, lack of clarity regarding residual values and a less attractive
fleet profile than higher-rated peers.
Over the past year, ILFC has continued to improve its funding profile by
reducing leverage, extending its debt maturities and building a liquidity
cushion. ILFC’s debt-to-tangible equity ratio declined to 2.8x from 3.9 since
2008. Additional reductions in leverage coupled with further development of
back-up liquidity sources would further improve the company’s overall financial
flexibility. ILFC has demonstrated sufficient financial flexibility to support
the servicing of its financial commitments over time on a stand-alone basis.
However, ILFC’s ratings reflect the company’s significant reliance on access to
capital markets to meet ongoing funding requirements and potential vulnerability
to capital market disruptions or exogenous shocks to the commercial aircraft
sector.
While Fitch recognizes the progress made by ILFC in improving its funding and
liquidity profile over the past three years, the ratings are constrained by
several factors. ILFC has been unprofitable for the past two fiscal years, which
has resulted from significant impairment charges on older aircraft. ILFC still
has the oldest aircraft fleet among Fitch-rated peers with a weighted average
age of eight years. While Fitch expects the age of the fleet to improve over the
next several years as ILFC takes deliveries of new aircraft, the current
composition of the fleet potentially exposes ILFC to the risk of additional
impairments in the coming periods.
ILFC has reported losses for the last two fiscal years as a result of large
impairments taken during the third quarters of each year. Despite these non-cash
charges, Fitch expects near-term fleet performance and operating cash flow will
remain adequate to support ongoing funding and capex requirements. The overall
performance of the aircraft fleet remains solid and generated cash flow from
operations of $1.4 billion during the first six months of 2012. On aggregate,
ILFC’s lease yields have largely remained consistent, even as some of its peers
have seen some weakness.
Over the past several years, AIG’s efforts to sell all or part of ILFC have
proved unsuccessful, including an attempted IPO last year. Fitch believes ILFC’s
strategy is likely to stay consistent in the event of an ownership change and
does not consider this to be a significant ratings driver. ILFC’s senior
management team has also seen a lot of turn over during the past three years,
including recent developments with the role of the current CEO.
RATING DRIVERS AND SENSITIVITIES
ILFC’s ratings are constrained by the company’s lack of profitability over the
past two fiscal years, which has been caused by significant impairment charges
on older aircraft, as well as the weighted average age of its fleet, which is
older than Fitch-rated peers. Negative momentum for the ratings and/or Rating
Outlook could result from additional impairment charges that are material in
size, inability to access capital markets to fund debt maturities or purchase
commitments, deterioration in operating cash flow or a meaningful increase in
leverage. Material changes in the senior management team may also have a
negative impact on the ratings.
While positive rating momentum is not likely in the near term, over a
longer-term time horizon, positive drivers could include consistent
profitability, demonstrated funding flexibility and commitment to reduced
leverage levels and clarity regarding ownership structure.
AerCap Holdings N.V.
The affirmation of AER’s ratings and Stable Outlook reflect its attractive
aircraft fleet, modest balance sheet leverage, diverse customer base, consistent
operating performance, strong competitive positioning, and solid management
team.
The ratings are constrained by the company’s largely secured funding profile,
maintenance of leverage at the upper end of the range articulated by management,
the potential influence of the company’s private equity owners and some
concentrations within its lender group. Therefore, positive rating momentum is
not expected in the foreseeable future.
AER has recently increased the total size of its share buyback program to $320
million from $130 million in April 2012 and repurchased $175 million shares from
Cerberus Capital Management L.P. The recent share repurchases have had a modest
impact on AER’s leverage and liquidity, which continue to support its
conservative credit profile. Fitch expects the company to be able to maintain
its debt-to-equity ratio at or below 3.0x, as its secured debt amortizes fairly
rapidly (2.7x as of June 30, 2012). Furthermore, AER continues to maintain an
adequate liquidity cushion to meet debt and purchase commitment obligations over
the next year. In Fitch’s view, the recent share repurchases have been
opportunistic in nature and do not impact the company’s conservative approach to
managing its capital structure and leverage.
Core earnings performance has remained relatively stable during the first six
months of 2012, despite recent aircraft repossessions and continued weakness in
lease rates. AER reported an adjusted ROA (excluding non-recurring charges) of
2.51% during the first half of 2012 (1H’12), compared to 2.29% for fiscal year
2011 (FY11). Fitch expects AER’s performance to be stable or modestly softer as
the company starts to pay higher interest rates on its recently-issued unsecured
debt and potentially has to absorb additional repossession costs.
RATING DRIVERS AND SENSITIVITIES
Negative rating actions could result if Fitch comes to view AER’s capital
management as becoming more aggressive or if the company fails to maintain its
debt-to-equity ratio at or below 3.0x over the long term. Weakened operating
performance and/or deterioration in the quality of the aircraft fleet could also
lead to negative rating actions. Conversely, further diversification of funding
sources, including a meaningful unsecured component, and greater stability with
respect to AER’s ownership group could potentially lead to positive momentum
over a longer-term time horizon.
In Fitch’s view, the limited amount of unsecured debt in AerCap’s capital
structure creates increased risks for the company’s unsecured creditors. In a
bankruptcy situation, AerCap’s unsecured debtholders would rely primarily on the
residuals of its encumbered aircraft after secured creditors are repaid.
Nevertheless, Fitch expects to equalize the unsecured rating with the IDR in
light of AerCap’s moderate leverage and attractive fleet. Should either of these
deteriorate, the unsecured rating would be notched down from the IDR.
Aviation Capital Group:
The affirmation of ACG’s ratings reflects its consistent operating performance,
attractive aircraft fleet and diverse funding profile. In Fitch’s view, ACG
maintains an adequate liquidity and cash flow profile to support the increased
number of aircraft deliveries it is scheduled to take over the next two years.
The revision of the Rating Outlook to Stable from Positive reflects recent
trends in ACG’s balance sheet leverage. ACG’s leverage, measured as
debt-to-equity, has improved only modestly to 4.38x as of June 30, 2012,
compared to 4.64x in the prior year period. This is less of an improvement than
Fitch had anticipated and is higher than other Fitch-rated peers. Fitch expects
leverage to remain between 4.0x – 5.0x in the near term, which is consistent
with the current rating category.
Top line revenues grew nearly 3% in 2011 as a result of portfolio growth, offset
by higher depreciation and interest expenses, which resulted in relatively flat
pre-tax earnings and net income for the year. ACG’s operating performance
remains in line with similarly-rated peers.
The company continues to make progress on diversifying its overall capital
structure and broadening its capital markets access and other various funding
sources to finance portfolio growth. As of June 30, 2012, the proportion of
unsecured debt has grown to represent 41% of the overall debt mix as a result of
two debt issuances in the 1H’12.
Based on the ‘Rating FI Subsidiaries and Holding Companies’ criteria, which was
published on Aug. 10, 2012, Fitch views ACG as having limited importance within
Pacific LifeCorp.’s (PLC) organization. This view is primarily determined by
limited synergies between ACG and PLC and lack of common branding. However,
ACG’s credit profile has benefited from its ownership and demonstrated financial
support provided by PLC and its main insurance operating entity, Pacific Life
Insurance Company (PLIC), which have IDRs of ‘A-‘ and ‘A’, respectively. PLIC’s
ownership of 100% of ACG’s equity amounted to nearly $1.2 billion of invested
capital, which represents a meaningful portion of the insurance company’s equity
base. ACG’s long-term IDR receives a one notch uplift from its stand-alone
rating of ‘BB+’ due to the PLC ownership. However, Fitch views future support as
uncertain, particularly in a stress scenario.
RATING DRIVERS AND SENSITIVITIES
Fitch believes positive rating momentum is currently limited based on ACG’s
current capitalization on a stand-alone basis. In addition, further uplift in
ACG’s current ratings over the near term is not envisioned unless balance sheet
leverage is further reduced to below 3.5x. Conversely, negative rating actions
could result from an unwillingness or inability of PLC to provide timely
support. Significant deterioration in financial performance and a material
decline in operating cash flow resulting from significant weakening of sector or
economic conditions, or a meaningful increase in balance sheet leverage could
also generate negative rating momentum.
BOC Aviation Pte Ltd:
The affirmation of BOC Aviation’s ‘A-‘ IDR and Stable Outlook reflect Fitch’s
view of a very high probability of support from Bank of China (BOC; ‘A’/Stable
Outlook), if needed. This view is premised on BOC Aviation’s strategic
importance to and strong links with BOC, as evident in the name-sharing, full
ownership and close board oversight by BOC, forthcoming resources, close
reporting links and cross selling potential, despite BOC Aviation’s small size
relative to BOC and their different domicile.
BOC Aviation’s robust asset growth of around 30% per year during 2007-2011,
aided by capital injection from BOC, has cemented its position as one of the top
five aircraft lessors globally by owned fleet. BOC also has committed a standby
liquidity line of $2 billion, which is considerable relative to BOC Aviation’s
assets of $8.2 billion at end-June 2012. BOC Aviation’s 10-member board
comprises eight BOC representatives, with a high-ranking officer of BOC
appointed as Chairman, even though the former accounted for only 0.4% of BOC’s
assets at end-June 2012. Moreover, the aircraft leasing company is among the few
wholly owned subsidiaries within the BOC group that reports directly to BOC’s
management. Cross selling initiatives center on BOC Aviation assisting BOC in
originating relationships with airlines and aircraft manufacturers.
Absent of institutional support, Fitch believes BOC Aviation has a credit
profile reflective of a ‘BB+’ rating. Relative to major peers, BOC Aviation has
a moderately high appetite for leverage and an almost complete reliance on bank
borrowings. However, its financial performance has been strong, due to active
fleet-quality management, aircraft procurement and collections, as well as low
funding cost. It has one of the youngest fleets in the industry, which attracts
higher quality lessees and results in lower residual risk. Fitch views
positively BOC Aviation’s demonstrated ability to trade aircraft through the
cycle, as illustrated by its ability to continually keep the average age of its
portfolio around four years.
RATING DRIVERS AND SENSITIVITIES
Any perceived changes in BOC’s propensity and ability to provide support would
impact BOC Aviation’s IDR. Changes in the agency’s view concerning the
standalone credit profile would be likely to take into account BOC Aviation’s
future leverage appetite, funding diversity and/or risk appetite in terms of
lessee quality and growth ambitions.
GATX Corporation:
The rating affirmations and Stable Outlook reflect GATX’s leading position and
expertise in the railcar leasing sector, consistent operating cash flow
generation and relatively stable performance through the cycle. Management’s
efforts to extend lease terms opportunistically over previous years of peak
market demand and pricing have helped maintain fleet utilization. Improved
conditions for rail transportation in North America contributed to a recovery in
lease rates, lease terms and utilization in 2011.
GATX’s customer base is relatively diversified and of good credit quality, with
the top 20 rail customers representing 34% of total annual Rail revenues and no
single customer representing greater than 3%. Asset quality trends have
improved significantly since 2002 and 2003, and overall asset quality metrics
have been relatively stable over the last several years.
Liquidity, comprised of balance sheet cash, availability under the revolving
credit facility and cash generated from operations, remains at adequate levels
for the rating category. However, GATX’s overall funding profile is shorter
than the useful life of its long-lived assets, thus refinancing risk is a
potential issue in the event of challenging economic conditions. As of June 30,
2012, GATX had $227.7 million of unrestricted cash and $100.5 million of
commercial paper and borrowings under bank credit facilities. Fitch believes
the company’s consistent cash flow generation and liquidity management strategy
through the cycle help to offset potential refinancing risk.
Balance sheet leverage has continued to trend upward over the last several
years, offset to some extent by an increase in unencumbered assets. Leverage is
fairly consistent with similarly-rated peers. Fitch remains comfortable with
GATX’s current leverage of approximately 4.0x, however, an increase in leverage
significantly beyond these levels could represent a rating concern.
RATING DRIVERS AND SENSITIVITIES
GATX’s operating margins could be pressured if demand for railcars stagnates as
a result of continued economic uncertainty or other market factors.
Consequently, negative rating actions could result if railcar demand declines
and lease rates weaken, negatively impacting overall lease income that would
ultimately hurt cash flow generation. In addition, an increase in balance sheet
leverage significantly beyond current levels could also yield negative rating
actions. While Fitch believes that positive rating momentum is limited given
GATX’s short-term funding profile and balance sheet leverage, the Rating Outlook
may be revised to Positive if GATX maintains its strong market position,
continues to generate consistent core operating profitability, operates with
appropriate liquidity and funding levels and deleverages its balance sheet.
Fitch has affirmed the following ratings:
International Lease Finance Corp.
–Long-term Issuer Default Rating at ‘BB’; Outlook Stable;
–$3.9 billion senior secured notes at ‘BBB-‘;
–Senior unsecured debt at ‘BB’;
–Preferred stock at ‘B’.
Delos Aircraft Inc.
–Senior secured debt at ‘BB’.
Flying Fortress Inc.
–Senior secured debt at ‘BB’.
ILFC E-Capital Trust I
–Preferred stock at ‘B’.
ILFC E-Capital Trust II
–Preferred stock at ‘B’.
AerCap Holdings N.V.
–Long-term IDR at ‘BBB-‘; Outlook Stable.
AerCap Aviation Solutions B.V.
–Senior unsecured debt rating at ‘BBB-‘.
AerCap B.V.
AerCap Dutch Aircraft Leasing I B.V.
AerCap Dutch Aircraft leasing IV B.V.
AerCap Dutch Aircraft Leasing VII B.V.
AerCap Engine Leasing Limited
AerCap Ireland Limited
AerCap Note Purchaser (IOM) Limited
AerCap Partners 767 Limited
AerCap Partners I Limited
AerFI Sverige AB
AerFunding 1 Limited
AerVenture Limited
Flotlease 973 (Bermuda) Limited
Flotlease MSN 3699 Limited
Flotlease MSN 973 Limited
Genesis Portfolio Funding 1 Limited
GLS Atlantic Alpha Limited
Harmonic Aircraft Leasing Limited
Melodic Aircraft Leasing Limited
Peony Aircraft Holdings Limited
Polyphonic Aircraft Leasing Limited
Rouge Aircraft Leasing Limited
Sapa Aircraft Leasing 2 BV
Sapa Aircraft Leasing BV
SkyFunding Limited
Symphonic Aircraft Leasing Limited
Synchronic Aircraft Leasing Limited
Triple Eight Aircraft Leasing Limited
Wahaflot Leasing 3699 (Bermuda) Limited
Westpark 1 Aircraft Leasing Limited
–Senior secured bank debt at ‘BBB’.
Aviation Capital Group:
–Long-term Issuer Default Rating at ‘BBB-‘; Outlook Stable;
–Senior unsecured debt rating at ‘BBB-‘.
BOC Aviation Pte Ltd:
–Long-term Issuer Default Rating at ‘A-‘; Outlook Stable.
GATX Corporation:
–Long-term Issuer Default Rating at ‘BBB’; Outlook Stable;
–Short-term Issuer Default Rating at ‘F2’;
–Senior unsecured debt at ‘BBB’;
–Commercial paper at ‘F2’.
GATX Financial Corporation:
–Senior unsecured debt at ‘BBB’.
Fitch has assigned the following rating:
Philharmonic Aircraft Leasing Limited (subsidiary of AER)
–Senior secured bank debt ‘BBB’.