KBRA Affirms Castlelake Aviation Limited’s Ratings

KBRA affirms the BB+ issuer rating of Castlelake Aviation Limited (“CA” or “the Company”) as well as the BBB- rating on the senior secured Term Loan B issued by Castlelake Aviation One DAC and guaranteed by the Company and the BB+ rating on the senior unsecured notes issued by Castlelake Aviation Finance DAC and guaranteed by the Company. The rating Outlook is Stable.

Key Credit Considerations

Castlelake Aviation Limited is an aircraft leasing company established in 2021 and managed by affiliates of Castlelake L.P. (Castlelake), a global investment firm and top-15 aircraft lessor, to complement Castlelake’s aviation investment strategy by focusing on new to young mid-life aircraft. CA’s ratings are supported by Castlelake’s experienced management team, established market presence and successful 18-year track record of aviation investing. Castlelake has invested over $18 billion in aviation opportunities through industry cycles since inception in 2005 and has a sizeable platform with 313 aircraft in its fleet. Castlelake has approximately $22 billion of assets under management in private funds and ABS debt structures and is currently investing out of its fourth dedicated aviation fund and raising a fifth dedicated aviation fund.

The ratings are also supported by CA’s appropriate Gross Debt-to-Tangible Common Equity leverage of 2.39x (2.29x net) at 2Q23 and target range of 2.5x-3x Debt-to-Equity, adequate liquidity of $1Bn at 2Q23 (comprised of $134 million in cash and $912 million of undrawn committed secured facilities¹ ), as well as an investment focus on young, narrow-body aircraft (68% narrow-body at 2Q23) which KBRA believes helps mitigate potential volatility of aircraft values and supports future trading opportunities. At 2Q23, CA had 106 aircraft assets in its portfolio (comprised of 104 young and mid-life in-production aircraft and two engines) with an average age of 4.9 years and an average remaining lease term of 8.7 years. In addition, CA had a contracted pipeline of 44 aircraft purchases comprised primarily (98%) of next generation aircraft which is expected to support future growth and further improve portfolio diversification in the near-term. In addition to adequate available borrowing capacity to fund near-term commitments, the Company has access to uncalled committed capital from Castlelake funds to support future growth.

These credit strengths are balanced by CA’s short operating history as a new entity for Castlelake’s investment in young aircraft, higher single lessee concentrations than higher-rated peers albeit reduced, less certain long-term growth trajectory without an orderbook and funding predominantly with secured debt, although the Company is focused on increasing its proportion of unsecured funding in the near-term and unencumbering assets.

At 2Q23, CA’s top lessee concentrations included Delta (17% of net book value), which is considered a solid credit, and AirAsia Berhad (17% of net book value), a Malaysian airline that was severely impacted by the pandemic and restructured its leases with lessors. AirAsia Berhad (“AAB”) was able to maintain sufficient liquidity through the pandemic with a combination of completed lease restructurings, asset monetization and debt and equity capital raises and has recently benefitted from the rebound in passenger traffic in the Asia Pacific region. KBRA notes that Castlelake management is focused on further reducing CA’s lessee concentrations through diversifying portfolio growth in the near-term.

The senior secured Term Loan B rating is one notch above the issuer rating which reflects its senior secured status, overcollateralization with a 70% loan-to-value but with a limited 1% annual amortization, and diversified collateral pool of primarily young and mid-life narrow-body aircraft. The senior unsecured Notes rating is aligned with the issuer rating which reflects a guarantee by CA, the Notes’ senior unsecured status, and KBRA’s view that the value of unencumbered assets, together with CA’s overall moderate leverage, would be expected to support unsecured debt recovery prospects in a default scenario. KBRA notes that the Company plans to increase its percentage of unsecured funding and unencumbered assets in the near-term.

The Stable Outlook reflects the strong recovery in global passenger air traffic, CA’s performing lessee base with strong cash collections rates (99%), investment focus on new and young in-demand aircraft, reduced top customer concentrations and a strong contracted near-term pipeline which is expected to further improve portfolio diversity, long-term leases with minimal near-term remarketing requirements, moderate leverage and adequate available liquidity relative to near-term debt obligations.

Rating Sensitivities

A ratings upgrade in the near future is not expected. However, over time, portfolio growth and significant reduction in lessee concentrations, significant increase in unencumbered assets and improved funding source diversity with a higher proportion of unsecured funding, while maintaining strong fleet quality, adequate liquidity, and leverage levels well within or below CA’s targeted 2.5-3x range, could lead to an upgrade. The Outlook could be revised to Negative or the ratings could be downgraded if the Company is unable to execute on its plans to improve portfolio diversity and unencumber assets, if leverage increases above targeted levels, or 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 the Company’s profitability, capital, and/or liquidity metrics. The senior unsecured Notes rating could be notched down from the issuer rating if the coverage of unsecured debt by unencumbered assets declines and the Company is unable to execute on its plan to increase unencumbered assets in the near-term to a level that substantially covers outstanding unsecured debt.

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Methodologies