Fitch Ratings has assigned an initial long-term Issuer Default Rating (IDR) of 'BBB-' to AerCap Holdings N.V. (AER). Additionally, Fitch has assigned senior secured debt ratings of 'BBB' to several of AER's financing subsidiaries. A full list of ratings is provided at the end of this release. The Rating Outlook is Stable.
Fitch's ratings reflect AER's relatively low leverage, attractive aircraft fleet, diverse customer base, consistent operating performance, strong competitive positioning, and solid management team. The ratings are constrained by the company's fully secured funding profile and concentrations in its lender group. Fitch believes upward rating momentum is limited by the cyclicality and business risk associated with the commercial aviation industry.
The company's conservative approach to managing its capital structure and leverage is one of the key factors underpinning the ratings. Over the last several years, AER has maintained a fairly conservative balance sheet, with modest leverage and limited financial covenants, which has allowed the company to achieve improved advance rates in its credit facilities. Fitch's ratings reflect AER's commitment to maintain a relatively low debt-to-equity ratio, which stood at 2.7 times (x) as of Dec. 31, 2011.
While entirely comprised of secured debt, AER's mix of funding sources is relatively diverse. Bank loans, securitization debt and export credit agency (ECA) guaranteed loans represent the bulk of the funding base. With the looming increase in the cost of ECA debt and funding constraints faced by European lenders, the company's funding strategy bears monitoring. Fitch believes these sources of funding could be replaced with additional securitizations, new lender relationships in Asia and/or unsecured issuance. The addition of a material unsecured funding component would provide additional financial flexibility and improve the company's credit profile.
Today's rating outcome also assumes that the company is able to maintain a relatively young and liquid aircraft fleet consistent with the current 5.5 year weighted average life. AER's owned portfolio is primarily comprised of newer narrowbody aircraft, which are viewed as high-quality assets by Fitch. However, there is a concentration in Airbus models, which represent close to 80% of the overall fleet.
Lease rates and values of A320 models have recently underperformed comparable Boeing aircraft, but the discrepancy has not been dramatic. If this gap widens, AER could be at a disadvantage versus competitors that have a more balanced portfolio. Still, the company is increasing its fleet of 737s through recent orders and sale/leaseback transactions. Longer-term, deliveries of new technology aircraft (A320neo and 737MAX) may put pressure on values and lease rates of current generation aircraft, which dominate lessors' fleets, although this is not expected to be an issue over the intermediate term, given delivery schedules.
AER's growth strategy has been more opportunistic than many of its peers. The company has pursued sizeable acquisitions when it is able to purchase assets at an attractive price. Sale/leaseback transactions, such as the one with American Airlines, have been instrumental in shaping the fleet. Over the past five years, AER has reduced the weighted average age of its owned fleet by two years by disposing of older aircraft and adding newer ones. Fitch views positively this proven ability to actively manage the fleet.
AER's customer base is more diversified than many of its similarly-sized peers, both in terms of the number relationships and the countries where lessees are based. This provides the company with access to a broader network of airlines and facilitates re-marketing efforts but may also introduce different risks with respect to the credit profiles of the lessees and the jurisdictions in which they operate. As of Dec. 31, 2011, AER's weighted average remaining lease period was 6.1 years, which is longer than most peers, particularly those with older fleets. Fitch believes the current lease expiration schedule is very manageable in the context of lease transactions executed over the past several years.
Core earnings performance, supplemented with gains from aircraft sales, has remained consistent over the most recent economic cycle. Returns have trended down modestly over the past several years as the company actively reduced the average age of its fleet. Newer aircraft tend to result in lower lease rate factors and returns because of the high book value in the initial years of ownership. This is evidenced by a decrease in AER's gross yield from 16.4% in 2007 to 11.9% in 2011.
However, this should be considered in a risk-adjusted return context, as the improved quality of the assets reduces residual risk and potential volatility in future earnings. AER has not taken a significant impairment since 2004 and is not likely to do so for the foreseeable future, in Fitch's opinion.
AER's active interest rate hedging strategy has helped it achieve an entirely fixed-rate balance sheet and one of the lowest costs of funds in the industry. In 2011, the company had an average cost of funds of 3.6%, in comparison to an average of 5% for its publicly traded peers (including ILFC). This is one of the key factors driving AER's consistent profitability measures. Embedded in this hedging strategy is an element of counterparty risk, which AER seeks to manage by transacting with highly rated counterparties. If the company is unable to maintain its hedging arrangements over time, its cost of funds and profitability could be materially impacted.
Fitch has assigned a 'BBB' rating to AER's secured bank debt, all of which is held at various subsidiaries. The one-notch uplift from the IDR reflects the collateral package, in the form of perfected liens on the aircraft, available to the lenders. Fitch does not rate any of AER's securitizations or ECA-guaranteed debt.
In Fitch's view, the ratings are well situated at the current level and positive momentum is expected to be limited over the near term, given the secured funding profile. Still, further diversification of funding sources, including a meaningful unsecured component, could lead to a one notch upgrade over a longer-term time horizon. Conversely, an increase in leverage, weakened operating performance and/or deterioration in the quality of the aircraft fleet could all lead to negative rating actions.
AerCap is a global aviation services company providing aircraft leasing and management services to its customers around the world. The company owns and manages approximately 350 aircraft with total assets of $9.1 billion, making it the third largest commercial aircraft lessor in the world. AerCap is headquartered in the Netherlands with offices in Ireland, the United States, China, Singapore and the UAE. The company is listed on the NYSE under the ticker symbol AER.
Fitch has assigned the following initial ratings:
AerCap Holdings N.V.
--Long-term IDR 'BBB-'; Outlook Stable.
AerCap B.V.
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 767 Limited
AerCap Partners I Limited
AerFI Sverige AB
AerFunding 1 Limited
AerVenture Leasing 1 Limited
AerVenture Limited
Burgundy Aircraft Leasing Limited
Flotlease 973 (Bermuda) Limited
Flotlease MSN 3699 Limited
Flotlease MSN 973 Limited
Genesis Portfolio Funding 1 Limited
GLS Atlantic Alpha Limited
Harmonic Aircraft Leasing Limited
Melodic Aircraft Leasing Limited
Peony Aircraft Holdings Limited
Polyphonic Aircraft Leasing Limited
Rouge Aircraft Leasing Limited
Sapa Aircraft Leasing 2 BV
Sapa Aircraft Leasing BV
SkyFunding Limited
Symphonic Aircraft Leasing Limited
Synchronic Aircraft Leasing Limited
Triple Eight Aircraft Leasing Limited
Wahaflot Leasing 3699 (Bermuda) Limited
Westpark 1 Aircraft Leasing Limited
--Senior secured bank debt 'BBB'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Aug. 16, 2011);
--'Finance and Leasing Companies Criteria' (Dec. 12, 2011).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=649171
Finance and Leasing Companies Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=659834
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