KBRA Affirms Avolon’s BBB+ Issuer and Senior Unsecured Debt Ratings
22 Mar 2024 | New York
KBRA affirms the BBB+ issuer rating and senior unsecured debt rating of Avolon Holdings Limited (“Avolon” or “the Company”) as well as the BBB+ ratings on the senior unsecured notes issued by Park Aerospace Holdings Limited and Avolon Holdings Funding Limited. The ratings Outlook is Stable.
Key Credit Considerations
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 (comprised of 60% new technology aircraft) with future growth supported by a large orderbook, contracted revenue with a diversified lessee base and comprehensive 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 ratings are also supported by strong capital and liquidity metrics and robust access to funding maintained through recent industry disruptions including the pandemic and the Russia-Ukraine conflict. As of Dec. 31, 2023 (YE23), leverage remained moderate at 2.3x Debt-to-Equity and the Company had $7.2 billion of available liquidity comprised of $6.2 billion undrawn committed facilities and $690 million of unrestricted cash, in addition to approximately $16.0 billion of unencumbered aircraft assets, which could provide a source of additional liquidity.
Avolon has maintained solid capital and liquidity metrics through recent industry disruptions including the severe impacts to air travel during the pandemic and impacts from the Russia-Ukraine conflict resulting in write-offs of Avolon’s aircraft in Russia (1% of year end-2021 fleet net book value). In 2022 and 2023, the Company’s underlying earnings profile improved along with the strong rebound in air traffic globally with improved cash collections, increased lease rates, lower non-accruals (0% at YE23) and lower aircraft transition expense.
These strengths are balanced by some limited exposures to airlines facing restructuring in the aftermath of the pandemic and moderate remaining receivables and deferral balances which declined materially in 2023 as the financial health of the Company’s lessees has improved overall and cash collection rates have recovered. 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 demand environment for aircraft globally. KBRA notes that Avolon must manage the placement risk of its significant orderbook as it has demonstrated historically; the orderbook is 96% placed with lessees through the end of 2025.
The ratings also consider that 43% of Avolon’s fleet by net book value (NBV) are wide-body aircraft 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. The challenges at the HNA Group are considered mitigated by Avolon’s strengthened governance framework, with minority ownership by Orix providing balanced control of board decisions. KBRA notes that Avolon has exposure to previously HNA-affiliated airlines now under the control of Liaoning Fangda Group Industrial Co Ltd. (Fangda), representing approximately 9% of NBV at FY23 which is partially mitigated by the majority purchase and recapitalization of previously HNA-affiliated airlines by Fangda, completed lease restructuring in 2021 with leases affirmed and an agreement to collateralize certain receivables due to Avolon with publicly traded shares in Hainan Airlines. KBRA notes that the lifting of travel restrictions and reopening of China is expected to drive continued improvement in the cash flow and financial performance of these airlines.
Avolon’s senior unsecured debt rating is the same as the issuer rating reflecting adequate coverage of unsecured debt by unencumbered assets (1.4x coverage at FY23) which supports unsecured recovery prospects. The senior unsecured notes issued by Avolon Holdings Funding and Park Aerospace, direct wholly-owned subsidiaries of Avolon, have an unsecured guarantee from Avolon.
The Stable Outlook reflects Avolon’s stable capital and liquidity metrics maintained through recent industry disruptions, improved earnings metrics and cash flow driven by the recovery in passenger air travel globally with higher fleet utilization, lower non-accruals and increased lease rates. 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 ratings 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 current levels, 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 the recovery in global passenger air traffic deteriorates 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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