Fitch Expects to Rate AerCap's Senior Unsecured Notes 'BB+'

NEW YORK--()--Fitch Ratings expects to assign a rating of 'BB+' to the senior unsecured notes to be issued by subsidiaries of AerCap Holdings NV (AerCap; 'BBB-'/Rating Watch Negative). The proposed debt would be issued by AerCap Ireland Capital Limited (Irish Issuer) and AerCap Global Aviation Trust (Delaware Issuer), both wholly owned subsidiaries of AerCap, and will benefit from a full and unconditional, joint and several guaranty of the parent company and various other subsidiaries.

The proceeds will be used to fund a part of the cash payment to American International Group (AIG) in connection with AerCap's acquisition of International Lease Finance Corp. (ILFC; 'BB'/Rating Watch Positive).

KEY RATING DRIVERS

The expected note issuance is part of the acquisition financing strategy that was articulated by the company in December 2013. The proceeds will replace the $2.75 billion committed bridge financing previously obtained by AerCap. Given the various guarantees, Fitch believes the proposed notes would rank pari passu with both AerCap's and ILFC's existing unsecured obligations.

Upon consummation of the acquisition, AerCap's balance sheet leverage will increase materially, primarily as a result of acquisition-related purchase accounting. Therefore, AerCap's credit profile will initially become riskier, but Fitch expects it to improve over time as the acquisition is integrated and equity is built up through retained earnings. The 'BB+' rating would be supported by the company's plans to maintain a conservative capital policy with no dividends or share repurchases until reported debt-to-equity is reduced to approximately 3.0x. Fitch believes the combined business offers fairly good visibility into future earnings and operating cash flows, which underpins the company's de-leveraging plan.

Fitch believes that the best measure of financial leverage for the combined company is tangible debt-to-tangible equity. This measure adjusts for certain accounting assets and liabilities that will be created as a result of purchase accounting, and is more reflective of the economic value of the balance sheet than the reported debt-to-equity ratio. Some of the adjustments include the fair value (FV) adjustment to ILFC's debt, the FV of the order book and the lease premium. According to Fitch's estimates, the initial tangible debt-to-tangible equity ratio will be 5.1x, higher than the reported pro forma leverage figure of 4.5x. However, the two measures are expected to converge as the purchase accounting adjustments get accreted over time.

The acquisition will significantly expand AerCap's access to unsecured funding, which is expected to represent approximately 60% of total debt on a pro forma basis. Furthermore, AerCap will acquire a large pool of unencumbered aircraft, which will provide support to unsecured creditors. Upon closing of the acquisition, Fitch expects to equalize the company's unsecured debt with its long-term Issuer Default Rating (IDR) because it will represent a significant part of the capital structure.

RATING SENSITIVITIES

Fitch believes positive rating momentum is possible over the longer term if AerCap executes on the plan it has outlined. More specifically, successful integration of ILFC's fleet and staff, a reduction of balance sheet leverage as outlined by the company, maintenance of robust liquidity and improvement in the fleet profile are viewed as positive rating drivers. Positive rating momentum could stall if AerCap runs into any meaningful integration issues, if dividends or share repurchase activity are reinstituted before deleveraging plans are completed, or if there is a material downturn in the aviation sector, which negatively impacts its business.

Downside risks to AerCap's ratings will be elevated until the acquisition is integrated and leverage is reduced. Negative rating actions could result from significant integration issues, loss of key airline relationships, deterioration in financial performance and/or operating cash flows, higher than expected repossession activity and/or difficulty re-leasing aircraft at economical rates. Longer term, aggressive capital management, a reduction in available liquidity or inability to maintain or improve the fleet profile could also lead to negative rating pressure.

Upon its acquisition of ILFC, AerCap will become one of the largest global aircraft lessors, with a fleet of over 1,300 aircraft and $43 billion in total assets.

Fitch expects to assign the following ratings:

AerCap Ireland Capital Limited

AerCap Global Aviation Trust

--Senior unsecured debt at 'BB+(EXP)'.

Fitch currently rates AerCap and its related subsidiaries as follows:

AerCap Holdings N.V.

--Long-term IDR 'BBB-', Rating Watch Negative.

Various operating subsidiaries of AerCap

--Senior secured debt 'BBB', Rating Watch Negative.

AerCap Aviation Solutions B.V.

--Senior unsecured debt rating 'BB+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'Finance and Leasing Companies Criteria' (Dec. 11, 2012);

--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);

--'Fitch Places AerCap's 'BBB-' L-T IDR on Rating Watch Negative on Proposed Acquisition of ILFC' (Dec. 16, 2013);

--'Fitch Places ILFC's IDR on Rating Watch Positive on Proposed Merger with AerCap' (Dec. 16, 2013).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696720

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Additional Disclosure

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Contacts

Fitch Ratings
Primary Analyst
Ilya Ivashkov, CFA, +1 212-908-0769
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Brendan Sheehy, +1 212-908-0138
Director
or
Committee Chairperson
Nathan Flanders, +1 212-908-0827
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Ilya Ivashkov, CFA, +1 212-908-0769
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Brendan Sheehy, +1 212-908-0138
Director
or
Committee Chairperson
Nathan Flanders, +1 212-908-0827
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com