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 Corp.:
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,). 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 percent during the first half of 2012 (1H'12), compared to 2.29 percent 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.
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, 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 percent 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, the proportion of unsecured debt has grown to represent 41 percent 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, 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 percent 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.
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 percent 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 percent 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.
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.
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 percent of total annual Rail revenues and no single customer representing greater than 3 percent. 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, 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.
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 LimitedAerCap Ireland LimitedAerCap Note Purchaser (IOM) LimitedAerCap Partners 767 LimitedAerCap Partners I LimitedAerFI Sverige ABAerFunding 1 LimitedAerVenture LimitedFlotlease 973 (Bermuda) LimitedFlotlease MSN 3699 LimitedFlotlease MSN 973 LimitedGenesis Portfolio Funding 1 LimitedGLS Atlantic Alpha LimitedHarmonic Aircraft Leasing LimitedMelodic Aircraft Leasing LimitedPeony Aircraft Holdings LimitedPolyphonic Aircraft Leasing LimitedRouge Aircraft Leasing LimitedSapa Aircraft Leasing 2 BVSapa Aircraft Leasing BVSkyFunding LimitedSymphonic Aircraft Leasing LimitedSynchronic Aircraft Leasing LimitedTriple Eight Aircraft Leasing LimitedWahaflot Leasing 3699 (Bermuda) LimitedWestpark 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 Corp.:--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 Corp.:--Senior unsecured debt at 'BBB'.
Fitch has assigned the following rating:
Philharmonic Aircraft Leasing Limited (subsidiary of AER)-- Senior secured bank debt 'BBB'.
Additional information is available at fitchratings.com. The ratings for GATX Corp. and GATX Financial Corp. were unsolicited and have been provided by Fitch as a service to investors. All the other ratings were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:--'Global Financial Institutions Rating Criteria' (Aug. 15,);--'Finance and Leasing Companies Criteria' (Dec. 12, 2011);--'Rating FI Subsidiaries and Holding Companies' (Aug. 10,);--'Aircraft Leasing Sector Review' (July 18,).
Applicable Criteria and Related Research:Global Financial Institutions Rating Criteriahttp://fitchratings.com/creditdesk/ reports/report_frame.cfm?rpt_id=686181Finance and Leasing Companies Criteriahttp://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=659834Rating FI Subsidiaries and Holding Companieshttp://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=679209Aircraft Leasing Sector Reviewhttp:// fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683404
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