Thought Leadership

Fitch Ratings completes aircraft lessor peer review: stable credit profiles despite looming macro risks

Fitch Ratings has completed its periodic peecr review of global aircraft lessors, which is comprised of nine rated firms. As part of the review, Fitch has affirmed the following rating and revised the Outlook to Positive from Stable:

--AerCap Holdings N.V.’s (AerCap) Issuer Default Rating (IDR) at ‘BBB-’/Outlook Positive

Fitch has also affirmed the ratings and the Outlooks remains Stable for the following issuers:

Issuer	Rating	Outlook
Air Lease Corporation’s (Air Lease)	IDR at ‘BBB’	Stable
Avolon Holdings Limited’s (Avolon)	IDR at ‘BBB-’	Stable
Castlelake Aviation Limited’s (Castlelake)	IDR at ‘BB’	Stable
China Aircraft Leasing Group Holdings Limited’s (CALC)	IDR at ‘BB+’	Stable
Dubai Aerospace Enterprise Ltd.’s (DAE)	IDR at ‘BBB-’	Stable

Fitch has affirmed the following ratings and Outlooks driven by shareholder support considerations

Issuer	Rating	Outlook
Aircastle Limited’s (Aircastle)	IDR at ‘BBB’	Stable
BOC Aviation Limited’s (BOCA)	IDR at ‘A-’	Stable
SMBC Aviation Capital Limited’s (SMBC AC)	IDR at ‘A-’	Negative

Individual rating action commentaries for each of the aircraft lessors are available at www.fitchratings.com. For further information on the rationale for each rating action, please refer to these commentaries.

The sector outlook for global aircraft lessors has been revised to ‘Neutral’ from ‘Improving’ given increased macro challenges compared to YE 2021, including the Russia-Ukraine conflict, elevated market volatility, sustained increases in oil prices, rising interest rates, growing inflation, and lingering pandemic variants. Fitch believes these factors could all contribute to delays in air traffic recovery leading into 2023. While rating headroom has decreased, with recent impairment charges taken on Russia aircraft, modest starting leverage and sufficient liquidity coverage offer a degree of cushion against negative rating migration.

For standalone aircraft lessors, Fitch believes they have sufficient liquidity to withstand near-term reductions in financing availability and lease cash flows under Fitch’s base case forecasts (the assumptions for which are outlined below) without breaching the liquidity coverage threshold of 1.0x. While Fitch anticipates some issuers may temporarily breach the agency’s 3.0x leverage threshold, given impairments taken in 1Q22, leverage is expected to revert below 3.0x within the Outlook horizon, even absent the receipt of insurance proceeds from recently filed claims. Pandemic and/or stagflation-driven impacts on airlines, that lead to additional lease restructurings, rejections, lessee defaults, and impairments, which negatively impact issuers’ liquidity position and capital, are watch items and could yield negative rating pressure over the medium term.

Issuer ratings and Outlooks that incorporate shareholder support considerations (continue to be primarily influenced by the credit risk profiles of their 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 Outlooks of these support providers change, so too could the ratings and/or Outlooks of the aircraft leasing subsidiaries. Changes in the standalone credit profiles of the aircraft leasing subsidiaries and/or changes in Fitch’s assessment of the support providers’ willingness to extend support could also impact the ratings and/or Outlooks of aircraft leasing subsidiaries.

Fitch’s aircraft lessor rating review remains focused on financial profile dynamics (particularly liquidity coverage and leverage) under base case assumptions. Fitch’s base case assumptions are as follows:

--Up to 15% cumulative lease deferrals for a six-month period, with a six-month lag in collections following the deferral period;
--Up to 9% of lessees default with 3% of the fleet being repossessed, followed by a six-month grounding of the aircraft and a 20% reduction in lease rates for the follow-on lease;
--Up to 30% of the net book value of aircraft is impaired following a customer default, partially offset by security deposits and maintenance reserves;
--Expiring leases over the next three years are renewed at a 20% lower rate;
--Unsecured bond markets remain accessible.