KBRA Affirms Ratings for Avolon Holdings Limited; Revises Outlook to Positive

KBRA affirms the issuer and senior unsecured debt ratings of BBB+ for Avolon Holdings Limited (“Avolon” or “the company”). KBRA also affirms the senior unsecured debt ratings of BBB+ for Park Aerospace Holdings Limited (Park Aerospace) and Avolon Holdings Funding Limited. In addition, KBRA affirms the issuer rating of BBB+ for Avolon’s wholly-owned subsidiary, Castlelake Aviation Limited (CA Ltd) and the senior unsecured debt rating of BBB+ for CA Ltd’s subsidiary, Castlelake Aviation Finance DAC (CAF). The Outlook is revised to Positive from Stable. Subsequently, KBRA withdraws Park Aerospace's senior unsecured debt rating at the issuer's request given this entity has no debt outstanding and will not issue debt in the future.

Key Credit Considerations

The revision of the Outlook to Positive reflects Avolon’s strengthened earnings metrics since the COVID pandemic with continued expected improvement driven by industry tailwinds, including robust air travel demand and aircraft supply constraints, a significant orderbook providing visibility to future fleet growth, and the roll-off of lower yielding pandemic-era leases replaced by higher yielding leases in a favorable environment. The Positive Outlook also reflects Avolon’s improved customer performance and asset quality metrics with a significant reduction in outstanding deferral and receivables balances, including previously higher exposure to Fangda-affiliate airlines. Avolon has maintained robust access to funding at attractive rates 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.

Avolon’s ratings are supported by the company’s franchise strength and strong market position as one of the largest aircraft lessors, combined with seasoned management team, in-demand young fleet with future growth supported by a large orderbook, 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 Avolon’s acquisition of CA Ltd in 1Q 2025, net debt-to-equity leverage is approximately 2.6x, which is 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 aircrafts with accretive yields.

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) at YE24 were 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, which in our view are mitigated by Avolon’s governance framework, with minority ownership by ORIX providing balanced control of board decisions.

The ratings of CA Ltd and CAO are aligned with Avolon’s, reflecting that these entities are wholly-owned subsidiaries of and integrated with Avolon since the acquisition in January 2025.

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

Rating Sensitivities

Factors that could positively impact the ratings over time include further sustained improvement of profitability metrics, fleet growth and successful management of orderbook placement risk and a higher percentage of unsecured debt (as a percentage of total debt) which increases funding flexibility, combined with sustained leverage at or below current levels, as well as maintenance of a strong liquidity profile and asset quality metrics.

A rating downgrade is unlikely in the near term. Negative rating action could occur 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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