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Fitch Ratings Takes Negative Actions on Global Aircraft Lessors

March 25, 2020, 06:59 AM
Filed Under: Aircraft

Fitch Ratings completed a rating review of global aircraft lessors, resulting in five issuers' Rating Outlooks being revised to Negative from Stable, one issuer being placed on Rating Watch Negative and one issuer being downgraded by one notch and placed on Rating Watch Negative. Three aircraft lessors, whose ratings are primarily or exclusively a function of institutional support considerations, are unaffected by these actions.

The Rating Outlooks of following five issuers have been revised to Negative from Stable:

  • Air Lease Corporation ('BBB')
  • AerCap Holdings N.V. ('BBB-')
  • Aviation Capital Group LLC ('BBB-')
  • Avolon Holdings Limited ('BBB-')
  • Dubai Aerospace Enterprise Ltd. ('BBB-')

The following issuer has been placed on Rating Watch Negative:

  • Voyager Aviation Holdings ('BB-')

The following issuer has been downgraded by one notch and placed on Rating Watch Negative:

  • Avation plc (to 'B+' from 'BB-')

The following three issuers are unaffected by these actions, reflecting institutional support considerations:

  • Aircastle Limited ('BBB-', Rating Watch Positive)
  • BOC Aviation Limited ('A-', Rating Outlook Stable)
  • SMBC Aviation Capital Limited ('A-' Rating Outlook Stable)

The rating actions reflect the unprecedented decline in global air traffic as a result of the coronavirus pandemic, which could lead to widespread lease deferrals/defaults, airline bankruptcies, aircraft repossessions and impairments absent abatement of the virus in the near- to intermediate-term and/or material sovereign intervention. Fitch previously revised the global aircraft leasing sector outlook to Negative from Stable on March 16.

Fitch's updated “Global Economic Outlook” published on March 19, cuts the agency's baseline global growth forecast for 2020 to 1.3 percent from 2.5 percent previously, while noting the increasing potential for an outright growth decline in the event more pervasive lockdown measures are rolled out across all the G7 countries. That said, Fitch's base case scenario assumes that "the health crisis will ease in 2H20, which should allow for a sharp bounce-back as activity reverts to normal levels, inventories are rebuilt, and some consumer and capital spending is re-profiled. Recent aggressive macro policy responses - with emergency interest rate cuts, massive central bank liquidity injections, macro-prudential easing, credit guarantee schemes and substantive fiscal stimulus - should also start to boost growth from 2H20, helping the level of GDP to revert to close to its pre-virus path over the medium term."

Fitch believes issuers placed on Rating Outlook Negative have sufficient liquidity to withstand near-term reductions in financing availability and lease cash flows, combined with sufficient capitalization headroom to withstand moderate impairments. Ratings for such issuers would be expected to be more adversely affected in a scenario where pandemic-driven declines in air traffic, airline solvency and financing availability are expected to last well into or beyond 2H20, particularly if liquidity coverage (defined as cash on hand, borrowing capacity on committed facilities and expected operating cash flows over the next 12 months to debt maturities and purchase commitments over the next 12 months) falls below 1.0x or leverage is in excess of 3.0x.

Fitch believes issuers placed on Rating Watch Negative have more limited capitalization headroom to withstand impairments, weaker near-term liquidity positions (particularly in the event of materially reduced lease cash flows), greater lessee concentrations and/or elevated exposure to less liquid current technology aircraft such as certain widebody aircraft and mid- to end-of-life narrowbody aircraft. Ratings for such issuers are sensitive to pandemic-driven declines in air traffic, airline solvency and financing availability that last well into or beyond 2H20, and particularly sensitive to underlying lessee and/or aircraft deterioration in the interim.

Issuers whose ratings and Rating Outlooks incorporate institutional support considerations will continue to be primarily influenced by the credit risk profiles of their institutional support providers and Fitch's ongoing assessment of these providers' willingness to extend financial support to subsidiaries in the event of need. To the extent the ratings and/or Rating Outlooks of these support providers change, so too could the ratings and/or Outlooks of the aircraft leasing subsidiaries.

While there are limited mitigating factors in the current environment, Fitch acknowledges that initial data indicates that the daily number of new coronavirus cases in China has fallen very sharply, while air traffic in the country has correspondingly begun to increase, albeit not yet toward pre-coronavirus levels. This dynamic suggests a potential recovery path for global air traffic should similar measures be employed in other countries and regions.

Fitch also notes the increasing potential for government support for the airline industry, although the magnitude and timing of any such support are not yet fully known, nor is how evenly any such support will be distributed amongst airlines. For example, while aircraft lessors have lease exposure to national carriers, which may be more likely to receive support, lessors typically have sizeable exposure to smaller and less strategically important airlines.

Recent and expected production declines at the aircraft manufacturers suggest that order book deliveries to aircraft lessors may be delayed, slowing a key need for financing, although manufacturers obviously have their own financial incentives to continue production. Finally, lower oil prices could serve to reduce a key expense item for airlines, but in many instances, this is offset by associated hedges and/or currency fluctuations.

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