Fitch Assigns Final Rating of 'BB-' to Avation's Unsecured Notes.
The notes are guaranteed by Avation PLC (Avation; BB-/Stable) and are to be consolidated with Avation Capital S.A.'s USD300 million senior unsecured notes issued in May 2018 under its Global Medium-Term Note Program.
The assignment of the final rating follows the receipt of documents conforming to information already received. The final rating is the same as the expected rating assigned to the senior unsecured notes on Nov. 15, 2018; see "Fitch Expects to Rate Avation's Unsecured Notes 'BB-'" at www.fitchratings.com.
Avation intends to use the net proceeds of the offering to repay certain existing senior secured loans and to pay transaction-related fees and expenses.
KEY RATING DRIVERS
The final note rating is equalized with the Long-Term Issuer Default Ratings (IDRs) of Avation PLC and Avation Capital S.A., as well as the rating of Avation Capital S.A.'s unsecured notes. The new notes will constitute the direct, unconditional, unsubordinated and unsecured obligations of Avation PLC and Avation Capital S.A and will rank equally with all the other unsecured and unsubordinated obligations.
Fitch last reviewed and affirmed the ratings on Avation PLC and Avation Capital S.A., as well as Avation Capital S.A.'s unsecured notes, during its aircraft-leasing peer review on July 17, 2018.
The ratings reflect Avation's current market position as a lessor of turboprop and jet aircraft in the Asia-Pacific and European regions. Credit strengths include the company's relatively young average fleet age of 3.4 years, excluding finance leases, as of Oct. 31, 2018, currently supportive demand dynamics for the majority of Avation's fleet, solid profitability, and measured fleet growth, which is expected to persist over the Outlook horizon.
These strengths are counterbalanced by Avation's limited economies of scale and high aircraft concentration when compared with larger lessors; the presence of turboprops in the portfolio, which Fitch views as niche aircraft; exposure to certain lower credit quality lessees, which is outsized relative to peers; elevated balance sheet leverage as measured by gross debt to tangible common equity; a primarily secured funding profile; and potential limitations relating to management depth.
Rating constraints applicable to the aircraft leasing industry more broadly include the monoline nature of the business, vulnerability to exogenous shocks, potential exposure to residual value risk, sensitivity to oil prices, reliance on wholesale funding sources and increased competition.
The unsecured debt rating is equalized with the company's IDR, reflecting Fitch's expectation of average recoveries for the senior unsecured debtholders under a stress scenario. The company's unencumbered pool has grown to approximately $150 million as a portion of the debt proceeds was used to repay secured debt.
Fitch does not expect upward rating momentum to emerge over the near term. However, over the long term, Avation's ratings could be positively influenced by improved scale efficiencies, leverage approaching 3.0x, increased utilization of unsecured funding sources and continued demonstration of residual-value risk management. Fitch would view improved fleet, geographic and/or lessee diversification positively, provided such actions are undertaken at a moderate pace and do not adversely affect underwriting or pricing terms.
The ratings could be adversely affected by the credit deterioration of underlying lessees, particularly those that represent a meaningful portion of Avation's portfolio, which could result in lower revenue yields and the need to redeploy aircraft. Factors that could also lead to negative rating momentum include maintenance of leverage above 4.0x; 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 rating assigned to the senior unsecured debt is equalized with the company's long-term IDR and would be expected to move in tandem. However, the unsecured debt rating could be notched below Avation's IDR should secured debt increase as a percentage of total debt such that the unencumbered pool contracts and expected recoveries on the senior unsecured debt were adversely affected.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Jan 22, 2019|
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