KBRA Affirms Dubai Aerospace Enterprise’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 Dubai Aerospace Enterprise (DAE) Ltd (“DAE” or “the Company”). The ratings Outlook is Stable.

Key Credit Considerations

The ratings reflect DAE’s strong market position globally, established franchise and track record (including the 35+ year history of AWAS, acquired in 2017), experienced management team, quality fleet with a good proportion of next generation fuel-efficient aircraft representing 47% of net book value (NBV) at Dec. 31, 2023 (FY23), near-term growth prospects supported by a Boeing 737 Max order book with deliveries through 2026, contracted revenue through long-term leases, strong capital and liquidity metrics maintained through recent industry disruptions, diversified funding sources including a strong proportion of unsecured debt, significant unencumbered assets and strong risk management infrastructure. The ratings are supported by the Company’s strong liquidity profile with unrestricted cash and available borrowing capacity of $4.1Bn at FY23 that covers two-year debt maturities and supports future growth. The ratings also take into consideration the long-term strategic ownership by Investment Corporation of Dubai (ICD), the principal investment arm of the Government of Dubai. KBRA believes that ICD’s significant financial resources, funding relationships and demonstrated commitment to aviation sector investments, provide DAE with franchise and funding benefits.

DAE has maintained adequate 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 2022 write-offs on aircraft in Russia (approximately 5% of year end-2021 fleet NBV). At FY23, leverage remained acceptable at 2.7x Debt-to-Equity (2.5x Net Debt-to-Equity). Since 2021, the Company’s underlying earnings profile, excluding the impact of Russia write-downs, improved along with the strong rebound in air traffic globally with improved cash collections, lower non-accruals and lower aircraft transition expense.

These strengths are balanced by top customer concentration (albeit declining) that is above highly-rated peers’, less certain long-term growth prospects (beyond orderbook deliveries through 2026) with a historical focus on sale-leasebacks and secondary market acquisitions which, KBRA notes, has allowed the Company to maintain solid fleet metrics to-date, and the cyclical nature of the industry and event risks in general. DAE has a moderate concentration to Emirates (10% of FY23 NBV), partially mitigated by Emirates’ strong credit profile. KBRA notes that DAE also has a moderate exposure to freighter aircraft (13% of FY23 NBV) comprised of Boeing 777 freighter aircraft which is considered a niche asset with a smaller operator/lessor base but is in-demand as a key component of intercontinental freight traffic benefiting from e-commerce trends.

The ratings also consider the improved overall health of the Company’s lessees with limited exposure to lessees facing bankruptcy and restructuring. These exposures are expected to be manageable considering DAE’s proven track record in managing restructurings and transitioning aircraft and the strong demand environment for aircraft globally. The Company’s asset quality metrics have largely recovered since the pandemic with strong cash collections and declining deferral balances. KBRA views DAE as well-positioned to manage future market disruptions given its management expertise, laddered debt maturities, strong capital base, solid liquidity and continued robust access to funding.

The alignment of the senior unsecured rating with the issuer rating reflects adequate unencumbered assets coverage of unsecured debt of 1.4x at Dec. 31, 2023, which supports unsecured debt recovery prospects.

The Stable Outlook reflects the Company’s moderate leverage, strong liquidity relative to near-term needs, improved earnings metrics and strong cash flow driven by higher fleet utilization, lease rates and cash collection during the industry recovery. During the pandemic, DAE demonstrated robust access to funding through bank and capital markets, effectively managed lease deferrals and defaults, and successfully remarketed aircraft to reduce off-lease aircraft and limit impairments, allowing the Company to maintain stable leverage and liquidity levels.

Rating Sensitivities

The ratings Outlook is Stable, therefore, a rating upgrade in the near-term is not expected. Over time, a significant increase in market share along with demonstrated ability to grow organically, sustained improvement in earnings metrics, maintenance of quality fleet metrics with continued improvement in new technology percentage and improved customer and aircraft type diversity, as well as broader access to funding sources and favorable pricing on aircraft purchases combined with sustained leverage at or below the low-end of DAE’s target range (2.5-3.0x Debt-to-Equity) and a strong liquidity profile, could lead to a rating upgrade.

The Outlook could be revised to Negative or Watch Downgrade 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 DAE’s profitability, capital and/or liquidity metrics. A significant change in ownership with reduced benefits from ICD ownership could also lead to a ratings downgrade.

To access rating and relevant documents, click here.

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A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

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Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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