KBRA Upgrades Castlelake Aviation Limited's Ratings Following Acquisition by Avolon

KBRA upgrades the issuer rating of Castlelake Aviation Limited (CA Ltd) to BBB+ from BB+ following its acquisition by Avolon Holdings Limited ("Avolon", "the company"). KBRA also upgrades the senior unsecured debt rating of CA Ltd’s subsidiary, Castlelake Aviation Finance DAC (CAF), to BBB+ from BB+ and upgrades the senior secured debt rating of its subsidiary, Castlelake Aviation One DAC (CAO) to BBB+ from BBB-. Subsequently, KBRA withdraws CAO’s senior secured debt rating following the full repayment CAO’s senior secured Term Loan B. The rating Outlook is Stable.

Key Credit Considerations

The rating upgrade and resolution of the Watch Upgrade status follow the completion of Avolon's (issuer and senior unsecured debt rating BBB+/Stable Outlook) $1 billion acquisition of CA Ltd on January 16, 2025 and reflect that CA Ltd, CAO, and CAF are now wholly-owned subsidiaries of and integrated with Avolon, and, as such, their ratings are aligned with Avolon’s as their new ultimate parent. Avolon intends to refinance CAF's outstanding $420 million senior unsecured notes in the near term, after which, KBRA expects to withdraw the remaining ratings for CA Ltd and CAF.

Avolon’s ratings are supported by the company’s franchise strength and strong market position as one of the largest aircraft lessors, seasoned management team, in-demand young fleet with future growth supported by a large orderbook, and contracted revenue with a diversified lessee base and strong risk management framework, as well as a diversified funding profile with a high proportion of unsecured debt and significant unencumbered assets which improves funding flexibility. The company’s earnings profile continued to strengthen in 2024 driven by strong aircraft demand amid a supply-constrained environment leading to higher lease rates as well as improved airline customer performance.

The ratings are also supported by Avolon's strong capital and liquidity metrics and robust access to funding maintained through recent industry disruptions. As of December 31, 2024 (YE24), leverage was moderate at 2.4x Debt-to-Equity (2.1x net Debt-to-Equity) and the company had $10.3 billion of available liquidity comprised of $7.2 billion undrawn committed facilities and $3.1 billion of unrestricted cash, in addition to approximately $20 billion of unencumbered aircraft assets, which could provide a source of additional liquidity. Pro-forma for the CA Ltd acquisition, net Debt-to-Equity leverage was approximately 2.6x but remains acceptable and in line with peers.

Following the CA Ltd acquisition, which added a portfolio of 106 aircraft and order commitments for 10 new-technology aircraft, Avolon’s fleet increased to 1,129 aircraft, including 664 owned and managed aircraft, and commitments for 465 new-technology aircraft. The transaction accelerated Avolon’s growth adding a portfolio of in-demand aircraft with accretive yields. At acquisition close, Avolon assumed approximately $3.3 billion of transferable debt from the CA Ltd portfolio, with the balance funded from Avolon’s existing sources of liquidity.

These strengths are balanced by the cyclical nature of the industry and exposure to event risk that could impact travel demand and cause potential credit issues for airline lessees. Potential impacts from future airline bankruptcies or restructurings are expected to be manageable considering Avolon’s proven track record in managing restructurings and transitioning aircraft and the strong aircraft demand environment. KBRA notes that Avolon must manage the placement risk of its significant orderbook as it has demonstrated historically; the orderbook is fully placed with lessees through 2026.

The ratings also consider that 44% of Avolon’s fleet by net book value (NBV) are wide-body aircraft (at YE24) which are typically less liquid and have higher transition costs compared to narrow-body aircraft. The ratings also take into consideration the weaker credit profile of Avolon’s majority shareholder, Bohai, and the financial challenges of Bohai’s parent, HNA Group, which are considered mitigated by Avolon’s governance framework, with minority ownership by Orix providing balanced control of board decisions.

The senior unsecured debt rating is the same as the issuer rating, reflecting adequate coverage of Avolon’s unsecured debt by unencumbered assets NBV (1.4x coverage at FY24) which supports unsecured debt recovery prospects.

The Stable Outlook reflects Avolon’s strong capital and liquidity metrics, improved earnings and cash flow driven by the recovery in passenger air travel globally, increased lease rates and improved customer performance. Avolon has maintained robust access to funding through bank and capital markets, even during the pandemic when it effectively managed lease deferrals and defaults, and successfully remarketed aircraft to reduce off-lease aircraft and limit impairments.

Rating Sensitivities

The rating Outlook is Stable, therefore, a rating upgrade in the near-term is not expected. Over time, continued significant unencumbering of assets, sustained improvement in profitability metrics, successful management of orderbook placement risk and stability of the company’s majority shareholder, combined with sustained leverage at or below the company's mid 2x target, as well as maintenance of a strong liquidity profile and attractive fleet quality metrics, could lead to positive rating momentum. The Outlook could be revised to Negative or the ratings could be downgraded if global passenger air traffic declines and leads to increases in delinquencies, defaults and/or impairments, or a decline in funding availability with significant negative impacts on Avolon’s profitability, capital and/or liquidity metrics. A notable increase in the company’s asset encumbrance could also trigger a review for downgrade.

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