Fitch Ratings has upgraded
The Rating Outlook is Stable.
Fitch has also upgraded the senior secured ratings assigned to Delos Finance SARL to 'BBB' from 'BBB-', the senior secured ratings from various debt-issuing, wholly owned subsidiaries of AerCap to 'BBB+' from 'BBB', the senior unsecured debt ratings to 'BBB' from 'BBB-', the junior subordinated notes to 'BB+' from 'BB' and the preferred stock ratings to 'BB' from 'BB-'.
Key Rating Drivers
The upgrade reflects AerCap's ability to reduce and maintain leverage, as calculated by Fitch, below 2.7x, in combination with the maintenance of a robust funding and liquidity profile, with revolver availability of over
Rating constraints include funding and placement risks associated with the company's orderbook and modestly higher exposure to less liquid tier 2 aircraft relative to peers given the company's 'barbell' portfolio construction strategy. Rating constraints applicable to the aircraft leasing industry more broadly include the monoline nature of the business; vulnerability to exogenous shocks; sensitivity to higher oil prices, inflation and unemployment, which negatively impact travel demand; potential exposure to residual value risk; and reliance on wholesale funding sources.
As of
In 2022, AerCap recorded a
AerCap's core operating performance has improved in line with a recovery in global aviation, supported by post-pandemic pent-up travel demand. Absent the non-cash impairment charge taken on its fleet leased to Russian airlines, AerCap would have reported pre-tax income of
Fitch's calculated leverage (gross debt to tangible equity), which treats AerCap's subordinated debt as 50% equity and junior subordinated debt as 100% equity, amounted to 2.5x as of
Unencumbered asset coverage of unsecured debt continues to improve, given a reduction in secured debt. Secured debt as a percentage of total assets was 14% and unsecured debt to total debt was 78% as of
At
The Stable Outlook reflects Fitch's belief that AerCap will maintain sufficient headroom relative to Fitch's downgrade triggers for liquidity coverage and debt to tangible equity leverage over the Outlook horizon, despite Fitch's expectations for increased macro challenges, including elevated market volatility, rising interest rates, growing inflation, and lingering pandemic variants, that lead to a downturn in economic conditions.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Macroeconomic and/or geopolitical-driven pressure on airlines, that lead to additional lease restructurings, rejections, lessee defaults, and impairments, which negatively impact the company's cash flow generation, profitability, and liquidity position could lead to negative rating actions. Negative rating pressure could also arise from a material increase in secured debt levels, leverage approaching or above 3.0x, resulting from capital returns, impairments or a higher risk appetite; liquidity coverage approaching or falling below 1.0x; or an inability to maintain a fleet profile comprised of highly liquid tier 1 aircraft and/or continued progress on transitioning its portfolio toward its new technology aircraft target of 75%.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Very strong and differentiated risk management and asset quality performance, while maintaining leverage below 2.5x, unsecured debt to total debt above 90%, a robust funding profile from revolver availability and liquidity coverage well in excess of 1.0x could yield positive rating actions. A material reduction in the size of the orderbook relative to the owned fleet, proactive management of near-term debt maturities, and a material increase of highly liquid tier 1 aircraft could also drive positive rating momentum.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The secured note ratings are one notch above AerCap's Long-Term IDR and reflect the aircraft collateral backing these obligations, which suggest good recovery prospects.
The senior secured term loan ratings for Delos Finance SARL, which is a wholly owned subsidiary of
The equalization of the unsecured debt ratings with AerCap and ILFC's IDRs reflects material unsecured debt as a portion of total debt, as well as the availability of sufficient unencumbered assets, which provide support to unsecured creditors and suggest average recovery prospects in a stressed scenario.
The two-notch differential between the Long-Term IDR and the junior subordinated notes reflects poor recovery prospects in a stressed scenario, due to the subordinated nature of the instruments and the cumulative nature of the coupon in the event of a deferral, which implies a higher probability of loss absorption.
The ILFC preferred stock ratings are three notches below the Long-Term IDR and reflect the deep subordination and going-concern loss absorption nature of the instruments. The guarantee under the ILFC preferred stock only guarantees payment of principal and interest when due in accordance with the terms. Current and deferred interest under the ILFC preferred stock would not be expected to be paid until more senior debt holders are paid in full.
In addition, the going concern loss absorption triggers are viewed by Fitch to be further subordinated to AerCap's junior subordinated notes as reflected by the one notch differential between the two instruments.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The senior secured debt, senior unsecured debt and hybrid debt ratings are primarily sensitive to changes in AerCap's and ILFC's IDRs, and secondarily, to the relative recovery prospects of the instruments.
SUBSIDIARY AND AFFILIATE RATINGS: KEY RATING DRIVERS
SUBSIDIARY AND AFFILIATE RATINGS: RATING SENSITIVITIES
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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