KBRA Affirms Fly Leasing’s Ratings with a Negative Outlook
12 Jan 2024 | New York
KBRA affirms the CCC issuer rating and CCC- senior unsecured debt rating of Fly Leasing Limited (“Fly” or “the Company”). The rating Outlook is Negative.
Key Credit Considerations
The ratings reflect the Company’s repurchases of approximately $200 million of its unsecured notes due in October 2024 (the “Notes”) at significant discounts in the secondary market which began in the quarter ended September 30, 2022 (3Q22) and continued in 2023, together with the Company’s weak financial profile characterized by high leverage, limited liquidity, and limited cash flow relative to near-term debt obligations. The repurchased Notes principal amount represents approximately 50% of the original $400mn Notes amount outstanding at 2Q22.
Fly’s credit metrics worsened in recent years driven by impacts from the pandemic and a slow recovery in certain regions, write-downs of aircraft on lease to Russian lessees and increased borrowing to raise liquidity. As of 3Q23, Fly’s available liquidity was minimal with $29 million of unrestricted cash and no revolving credit facility. Despite improved operating cash flow in 2023 driven with the global traffic recovery, available cash flow after secured debt service requirements has remained limited. Given Fly’s elevated leverage (4.2x Debt-to-Equity as of 3Q23), minimal unencumbered assets and significant secured debt service requirements, the Company could be challenged to generate sufficient cash flow (absent additional shareholder support) to repay the Notes at maturity which could lead to a default or debt restructuring. KBRA notes that Fly’s sponsor (a Carlyle Aviation fund) contributed a total of $103 million of equity capital to Fly in 2022 and 2023, which supported the Company’s Note repurchases. However, the ratings do not contemplate additional external support from the sponsor which has no contractual requirement to provide support.
The unsecured debt rating is notched down from the issuer rating reflecting the potential for below average recovery prospects in the event of a default or restructuring given Fly’s limited unencumbered assets that do not cover unsecured debt amounts outstanding and significant secured borrowing, a substantial portion of which matures after the Notes.
The Negative Outlook reflects the Company’s limited available liquidity and KBRA’s expectation that cash flow available to meet the unsecured Notes maturity in October 2024 will remain limited which could cause Fly to default on the Notes or seek to restructure the Notes, absent additional capital support from its shareholder.
Rating Sensitivities
A ratings upgrade in the near-term is not expected. The rating Outlook could be revised to Stable if Fly repays its outstanding unsecured Notes, demonstrates sustained cash flow improvement and improves its available liquidity relative to near-term debt obligations. Over time, a significant improvement in Fly’s liquidity profile combined with a sustained decline in leverage, improved lessee diversification, and stable profitability, could lead to consideration of a ratings upgrade. The ratings could be downgraded if Fly defaults on a debt payment or seeks to restructure debt with material negative economic impacts to creditors.
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