NEW YORK--(BUSINESS WIRE)--Fitch Ratings has today assigned Avation PLC (Avation) a Long-Term Issuer Default Rating (IDR) of 'B+' and a senior unsecured debt rating of 'B+/RR4'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
Avation is a Singapore-headquartered commercial passenger aircraft leasing company focused primarily on turbo prop aircraft in the Asia-Pacific region. As of March 31, 2015, its fleet was comprised of 19 ATR72 500-600s and 10 narrowbody regional 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.
KEY RATING DRIVERS
IDRS AND SENIOR DEBT
Avation's IDR reflects its market position leasing turboprop aircraft in Asia, an aircraft which benefits from favourable supply/demand dynamics, consistent operating performance, strong credit metrics and residual realization over time, appropriate liquidity and experienced management team. Ratings also reflect strong underlying secular trends within the aviation industry, including growth in passenger traffic and a continued shift by airlines toward utilizing operating leases to meet their aircraft needs.
These strengths are counterbalanced by Avation's monoline business model with a primary focus on niche aircraft, outsized portfolio concentrations, elevated exposure to lower credit quality lessees within a cyclical industry, limited scale, potential limitations with respect to governance and management depth, reliance on wholesale funding sources and elevated balance sheet leverage, as measured by total gross debt to total tangible common equity.
The company's high proportion of secured funding is also viewed as a rating constraint as it reduces financial flexibility particularly in the event of an economic downturn or other unexpected event. Furthermore, Fitch views execution risk as elevated given the company's planned rapid expansion over the near- to intermediate-term.
The Stable Rating Outlook reflects Fitch's expectation for limited upward rating momentum over the outlook horizon, particularly given the aforementioned execution risk associated the company's growth aspirations.
The 'B+/RR4' ratings assigned to Avation's senior unsecured debt are equalized with the company's IDR, reflecting Fitch's expectation for average recoveries (i.e. 31 - 50%) for the senior unsecured debtholders.
Avation's current fleet is primarily composed of ATR aircraft, which is viewed by Fitch as a niche aircraft, albeit one with favourable characteristics which have supported demand and residual values to date. Specifically, the ATR is more fuel efficient than a regional jet, has a broad operator base and is less exposed to technological change relative to jets. Avation also benefits from favourable order book positions with respect to future ATR deliveries, which may support performance in the near- to medium-term. Longer-term, however, Fitch expects Avation's portfolio mix to evolve as existing orders are delivered and the company expands further into jet aircraft.
From an earnings perspective, Avation has been profitable since going public in 2006, with strong lease yields outpacing elevated funding costs. For 2014, Avation reported a return on assets and a return on equity of 2.7% and 11.6%, respectively, supported by an average lease yield of 14.4%.
Avation's leverage and funding profile are viewed as rating constraints given the company's reliance on wholesale funding sources and limited unsecured debt. Pro forma for the company's $100 million unsecured debt issuance in May 2015, Fitch calculates Avation's debt to tangible equity to be 3.9x and its secured debt as a percent of total debt to be 76.6%.
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, a significant increase in leverage levels, rapid expansion which 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 rates the following:
--Long-term IDR 'B+'; Outlook Stable;
Senior unsecured debt 'B+/RR4'.
Additional information is available on www.fitchratings.com
Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)
Dodd-Frank Rating Information Disclosure Form