NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the long-term Issuer Default Rating (IDR) of AerCap Holdings N.V. (AerCap) to 'BB+' from 'BBB-' and removed the rating from Rating Watch Negative. Concurrently, Fitch upgraded International Lease Finance Corp.'s (ILFC) long-term IDR to 'BB+' from 'BB' and removed the rating from Rating Watch Positive. The Rating Outlook on all ratings is Stable. A full list of rating actions follows at the end of this press release.
Today's rating actions follow the completion of AerCap's previously announced acquisition of ILFC. The ratings of the two issuers have been equalized, as ILFC is considered a core subsidiary of AerCap under Fitch's criteria 'Rating FI Subsidiaries and Holding Companies'. This is based on the planned integration of ILFC, guarantees provided by AerCap on ILFC's existing debt obligations and common management team.
The purchase price of $6.9 billion includes $3 billion in debt and cash and approximately $3.9 billion in newly issued AER shares. This amount is higher than the $5.4 billion initially announced purchase price as a result of an increase in AerCap's share price. AIG has become the largest shareholder in AerCap, owning approximately 46% of the combined company. AIG has also provided AerCap with a committed $1 billion five-year unsecured revolving facility, which is included in the company's liquidity buffer.
KEY RATING DRIVERS - AerCap & ILFC IDRs
The equalization of the ratings at 'BB+' is supported by:
--The markdown of ILFC's fleet, which reduces risk of future impairments, supports the quality of the equity base, and allows more flexibility to sell or part out older aircraft;
--Available tax benefits from elimination of the DTL and re-domiciling of ILFC assets to a more tax favorable jurisdiction;
--Significant unsecured funding under the combined company's combined balance sheet;
--Expected stable cash flow leverage and coverage measures;
--Potential for post-integration operational and cost efficiencies for the combined firm;
--Elimination of ownership uncertainty, which has constrained ILFC's ratings for several years.
The ratings are constrained by:
--Increased tangible balance sheet leverage to approximately 5.1x, heightening sensitivity to a market stress or a cyclical downturn;
--Material execution and integration risk, as ILFC is approximately four times larger than AerCap;
--The change in strategic direction for AerCap;
--Increased average fleet age by over two years for the combined company;
--Increased funding risk associated with the order book for the combined company, partly mitigated by attractive prices and delivery slots.
AerCap's balance sheet leverage has increased materially, primarily as a result of the assumption of ILFC's existing debt and acquisition-related purchase accounting. Therefore, AER'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 is 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 requires significant integration efforts, which will continue to consume meaningful time and effort of AerCap's senior management team. In Fitch's view, the acquisition brings a significant amount of integration and execution risk as AerCap transfers ILFC's fleet and ILFC's staff onto AerCap's platform. These risks are mitigated to some extent by AerCap's scalable operating platform (including its interest in AerData), the relatively small number employees at ILFC, overlapping locations of regional offices and prior ownership of the AeroTurbine platform which will be reacquired as part of the transaction.
Fitch believes that the acquisition will result in a significant shift to AerCap's current business strategy. The size of the fleet will rise dramatically to approximately 1,200 aircraft from 238 as of March 31, 2014; and its average age will increase by roughly two years, to over seven years from 5.6 years as of March 31, 2014. Historically, AerCap's strategy focused on newer aircraft, a modest fleet size and a moderate order book supported by a predominantly secured funding profile.
With the acquisition of ILFC, AerCap has become the owner of one of the largest order books in the industry. Fitch recognizes that ILFC's orders represent some of the most in-demand aircraft in the market and were placed at attractive prices and delivery slots. However, the long-term nature of the commitments creates a liability that may need to be funded at a time when capital is not readily available. Furthermore, given the cyclical nature of the aviation market and continual technological advances, the contracted purchase price of the aircraft could potentially exceed the market value on the delivery date.
Despite the concerns cited above, Fitch believes that the acquisition offers potential long-term strategic benefits for both AerCap's and ILFC's creditors. The economics of the combined business are expected to remain intact, with no immediate impact to lease cash flows and a modest increase in the debt balance to fund the cash portion of the purchase price. AerCap expects to reap significant tax benefits by re-domiciling the vast majority of ILFC's assets to Ireland and leaving ILFC's large deferred tax liability with AIG.
AerCap's post-acquisition liquidity position stands at approximately $6 billion, comprised of $2 billion in unrestricted cash and $4 billion of undrawn revolver availability. The company plans to maintain a liquidity buffer (including cash flow from operations, unrestricted cash and undrawn revolvers) at 120% of debt maturities and capital expenditures over the next 12 months. Fitch views this as a conservative capital position, which is prudent given AerCap's significant purchase commitments and debt maturities.
KEY RATING DRIVERS - AerCap & ILFC Senior Unsecured Debt
The acquisition of ILFC has significantly expanded AerCap's access to unsecured funding, which is expected to represent approximately 60% of total debt on a pro forma basis. Furthermore, AerCap has acquired a large pool of unencumbered aircraft, which will provide support to unsecured creditors going forward. Therefore, Fitch has equalized AerCap's and ILFC's unsecured debt ratings with their IDRs.
KEY RATING DRIVERS - AerCap & ILFC Senior Secured Debt
The downgrade of AerCap's senior secured debt ratings to 'BBB-' from 'BBB' reflects the rating downgrade of AerCap's long-term IDR and maintains the one-notch differential between the long-term IDR and senior secured debt ratings. The affirmation of ILFC's senior secured debt ratings at 'BBB-' reflects compression of the notching with the IDR to one notch from two notches and equalization with AerCap's secured debt ratings. The senior secured debt of AerCap and ILFC are rated one notch higher than the respective IDRs because of the aircraft collateral backing these obligations.
The senior secured debt issued by Flying Fortress, Inc. and Delos Finance SARL, both wholly owned subsidiaries of ILFC, is equalized with the IDR of ILFC. This debt is secured via a pledge of stock of the subsidiaries and related affiliates and is guaranteed by ILFC on a senior unsecured basis. The ratings on these secured term loans are not notched above ILFC's IDR due to the lack of a perfected first priority claim on aircraft provided to support repayment of the term loan. Furthermore, there is a risk of substantive consolidation of Flying Fortress, Inc., Delos Finance SARL and related affiliates in the event of an ILFC bankruptcy.
KEY RATING DRIVERS - ILFC Hybrid Debt
The upgrade of ILFC's preferred stock rating to 'B+' from 'B' reflects the rating upgrade of ILFC's long-term IDR and maintains the existing three-notch differential between the long-term IDR and preferred stock rating. This is consistent with Fitch's 'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' criteria published on Dec. 23, 2013.
RATING SENSITIVITIES - AerCap & ILFC IDRs, Senior Unsecured Debt, Senior Secured Debt and Hybrid Debt
Fitch believes positive rating momentum is possible over the longer term as AerCap continues to execute 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. Fitch will also assess AerCap's ability to effectively manage the average age and composition of its fleet. 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 and ILFC's ratings will be elevated until the acquisition is fully 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.
Fitch has downgraded the following ratings and removed them from Rating Watch Negative:
AerCap Holdings N.V.
--Long-term IDR to 'BB+' from 'BBB-', Outlook Stable.
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 I Limited
AerCap Partners 767 Limited
AerFunding 1 Limited
AerVenture Leasing 1 Limited
Flotlease MSN 973 Limited
Genesis Portfolio Funding 1 Limited
GLS Atlantic Alpha Limited
Harmonic Aircraft Leasing Limited
Melodic Aircraft Leasing Limited
Philharmonic Aircraft Leasing Limited
Rouge Aircraft Leasing Limited
Sapa Aircraft Leasing 2 BV
Sapa Aircraft Leasing BV
Symphonic Aircraft Leasing Limited
Triple Eight Aircraft Leasing Limited
Wahaflot Leasing 3699 (Bermuda) Limited
Westpark 1 Aircraft Leasing Limited
AerCap Ireland Funding I Limited
AerCap Leasing 946 Limited
Cielo Funding Limited
Harmony Funding BV
Parilease / Jasmine Aircraft Leasing Limited
Worldwide Aircraft Leasing Limited
Skyfunding II Limited
--Senior secured bank debt to 'BBB-' from 'BBB'.
Fitch has affirmed the following ratings:
AerCap Ireland Capital Limited
AerCap Global Aviation Trust
AerCap Aviation Solutions B.V.
--Senior unsecured debt rating 'BB+'.
International Lease Finance Corp.
--$3.9 billion senior secured notes at 'BBB-'.
Fitch has upgraded the following ratings and removed them from Rating Watch Positive:
International Lease Finance Corp.
--Long-term IDR to 'BB+' from 'BB', Outlook Stable;
--Senior unsecured debt to 'BB+' from 'BB';
--Preferred stock to 'B+' from 'B'.
Delos Finance SARL
Flying Fortress Inc.
--Senior secured debt to 'BB+' from 'BB'.
ILFC E-Capital Trust I
ILFC E-Capital Trust II
--Preferred stock to 'B+' from 'B'.
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);
--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' (Dec. 23, 2013);
--'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
Finance and Leasing Companies Criteria
Rating FI Subsidiaries and Holding Companies
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis