Fitch Ratings said it has completed a peer review of five rated aircraft lessors, resulting in the affirmation of the long-term Issuer Default Ratings (IDRs) of AerCap Holdings N.V. (AER, ´BB+´), Avation PLC (AVAP, ´B+´), Aviation Capital Group (ACG, ´BBB-´), BOC Aviation Pte Ltd (BOC Aviation, ´A-´) and SMBC Aviation Capital Limited (SMBC AC, ´BBB´).
The Rating Outlooks for AER and ACG have been revised to Positive from Stable and the Outlooks for AVAP, ACG and BOC Aviation remain Stable.
The revision of AerCap´s Outlook to Positive reflects deleveraging and fleet optimization undertaken by the company, combined with Fitch´s expectation of further deleveraging over the outlook horizon. Fitch also believes execution/integration risk associated with the International Lease Finance Corp. (ILFC) acquisition has significantly abated given that the company has successfully combined the ILFC fleet into the portfolio and largely completed the staff integration.
The revision of ACG´s Outlook to Positive reflects improvements in ACG´s stand-alone credit profile, most notably including reduced balance sheet leverage (debt-to-tangible equity) appetite over the last several years, driven by a capital injection of USD150 million in March 2014 by from ACG´s parent, Pacific Life Insurance company, and continued retained earnings growth. Balance sheet leverage on a consolidated debt to equity basis was 3.2x as of March 31, 2015, a material improvement from the historical average of between 4x and 4.5x over the last several years.
The aircraft finance market has remained healthy and is expected to continue this trend during the remainder of the year, with aircraft lessors benefitting from strong liquidity provided by a balanced group of funding sources including the capital markets (e.g. securitization financing, unsecured debt) and commercial banks.
The Export-Import Bank of the US´s (Ex-Im) cessation of new lending activities does not have an immediate impact on aircraft leasing companies given the broad market access they currently enjoy; however, a permanent loss of Ex-Im would eliminate a contingent funding source for these lessors. Ex-Im has historically been viewed by Fitch as an important back-up funding option for aircraft lessors, particularly those with material long-term contractual order books with Boeing.
While there is a fair amount of homogeneity in the business models of aircraft lessors, distinctions can be made between their leverage appetites and fleet profiles, in part informed by the ownership structure of the lessor and the potential for strategic and/or financial support to be extended to the lessor from the parent company. In assessing the leverage appetites of aircraft lessors, Fitch considers the risk profile of the fleet (and the related airline/geographic exposure) as well as the extent to which parental support can offset the risks of elevated leverage on a stand-alone basis.
Among the challenges aircraft lessors will need to navigate over the coming years include industry cyclicality, geopolitical risk, oil price volatility, competitive pressures on underwriting standards, funding and placing the delivery of large aircraft order books, residual value risk associated with older model planes, and rising interest rates. Fitch remains cautious as downside risks to a global economic recovery remain elevated, particularly as it relates to the lackluster economic recovery in the European Union and Japan, slowing growth in China, and geopolitical and other events, including in Greece, Russia and the Middle East.