NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Avation PLC's (Avation) Long-Term Issuer Default Rating (IDR) at 'B+' and senior unsecured debt rating at 'B+/RR4'. The Rating Outlook is Stable.
These actions are being taken in conjunction with a broader aircraft leasing industry peer review conducted today by Fitch, which includes five publicly rated firms. For more commentary on the broader sector review, please see 'Fitch Completes Aircraft Lessor Peer Review', available at 'www.fitchratings.com'.
KEY RATING DRIVERS - IDR AND SENIOR DEBT
The affirmation of the IDR at 'B+' reflects Avation's current market position as a lessor of predominantly turboprop aircraft in the Asia-Pacific and European regions. Credit strengths include the company's young average fleet age of 4.2 years as of May 31, 2016, supportive demand dynamics for the majority of Avation's fleet and operating performance that is benefiting from favorable industry trends including growth in passenger traffic and a continued shift by airlines toward utilizing operating leases to meet their business needs.
These strengths are counterbalanced by Avation's limited economies of scale and high aircraft concentration, its monoline business model with a focus on niche aircraft, exposure to lower credit quality lessees, increasing balance sheet leverage as measured by gross debt to tangible common equity, a primarily secured funding profile, potential limitations in connection with corporate governance and management depth, and overall execution risk given the company's planned rapid expansion over the near to intermediate term.
Avation's fleet totaled 39 aircraft as of May 31, 2016, primarily composed of ATR72 500-600s, aircraft which have experienced a resurgence in orders over the past few years primarily driven by favorable operating economics. Though viewed by Fitch as niche, these planes have an established operator base, and relative to regional jets, ATRs are more fuel efficient and less exposed to technological disruption. These dynamics supported Avation's 100% utilization rate at May 31, 2016. In the near to medium term, Avation's overall performance and growth are expected to be supported by additional ATR deliveries. In the long term, Fitch expects Avation's fleet to evolve as the company expands further into more widely-utilized aircraft, as evidenced by Avation's increased exposure to narrow-body jets through recent and impending deliveries of Airbus A321 aircraft.
Avation has been profitable since inception with growing lease revenue and consistent lease yields. As of 1H16, Avation's lease yield was 13.4%, which was one of the highest within the peer group, but down from 13.7% in 1H2015. Avation's high lease yields are partially attributed to the lower funding costs associated with its predominantly secured debt funding profile, with the year-over-year decline coinciding with the incremental interest expense associated with the introduction of Avation's global unsecured medium term note program. However, Fitch believes Avation's elevated lease yields also correspond to asset and/or lessee risk associated with the company's focus on turboprop aircraft which are often leased to weaker credit quality airlines.
Avation's leverage, calculated as gross debt to tangible common equity, has been increasing over the past several years and was 4.0x as of Dec. 31, 2015, up from 3.4x as of June 30, 2015 and 3.0x as of June 30, 2014. The increase in leverage was in line with Fitch's expectations when the company issued 7.5% unsecured notes due 2020 and used the proceeds to grow its fleet base; however, Fitch expects the company to de-leverage as overall fleet growth stabilizes. While the issuance of 7.5% unsecured notes due 2020 diversified the funding profile and demonstrated access to the unsecured markets, secured funding continued to comprise almost 80% of Avation's debt as of 1H16. Avation's high proportion of secured debt constrains the company's financial flexibility. Fitch views further unsecured debt issuance as unlikely in the near term as Avation's unsecured notes were trading in excess of 9% as of May 31, 2016 which would meaningfully compress net lease spreads.
The Stable Outlook reflects Fitch's view that while Avation has benefitted from supportive demand dynamics for its fleet, modest growth/diversification and the incremental introduction of unsecured debt, high leverage and execution risk associated with the company's continued growth aspirations are offsetting considerations.
The affirmation of the unsecured debt ratings at 'B+/RR4' maintains the equalization with the company's IDR, reflecting Fitch's continued expectation for average recoveries (i.e. 31 - 50%) for the senior unsecured debtholders.
RATING SENSITIVITIES - IDR AND SENIOR DEBT
Avation's IDR and senior unsecured debt ratings could be positively influenced by improved fleet, geographic and/or lessee diversification provided such actions are undertaken at a moderate pace and do not adversely affect underwriting or pricing terms. Reduced leverage, increased utilization of unsecured funding sources, improved scale efficiencies and continued demonstration of residual value risk management would also be viewed positively.
The ratings could be adversely affected by the credit deterioration of underlying lessees, particularly those which represent a meaningful portion of Avation's portfolio, leverage sustaining between 4.0x-5.0x over the long term, rapid expansion that is not accompanied by consistent underwriting standards and commensurate growth in capital levels and staffing, deterioration in residual value realizations or an inability to successfully navigate market downturns.
The ratings assigned to the senior unsecured debt could also be notched below Avation's IDR should secured debt increase to such an extent that expected recoveries to the senior unsecured debt were adversely affected.
Fitch has affirmed the following ratings:
Avation PLC
--Long-Term IDR at 'B+';
--Senior unsecured debt at 'B+/RR4'.
The Rating Outlook is Stable.
Avation is a Singapore-headquartered commercial passenger aircraft leasing company focused primarily on turboprop aircrafts in the Asia-Pacific and European regions. As of June 30, 2016, its fleet was comprised of 24 ATR72 500-600s and 14 narrow-body jets (A320-321s and F100s). The company was incorporated in England and Wales in 2006 and is listed on the London Stock Exchange under the ticker AVAP.
Date of Relevant Committee: July 25, 2016
Summary of Financial Statement Adjustments: Fitch has made no adjustments that are not disclosed within the company's financial statements.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=884128
Additional Disclosures
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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009485
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009485
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