Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDR) of Singapore-based lessor, Avation PLC and its subsidiaries, Avation Capital and Avation Group to 'CC' from 'B'.
Fitch has also downgraded the rating of Avation Capital's senior unsecured notes guaranteed by Avation to 'C' from 'B-' and maintained a 'RR5' Recovery Rating. The ratings have been removed from Rating Watch Negative.
Fitch explained that the downgrade of Avation's ratings reflected the “imminent refinancing risk for the company's senior unsecured bond due in May 2021”, adding that the 'CC' IDR reflects Fitch's expectation of a very high level of credit risk and that an event of default or an exchange or restructuring of existing debt is probable.
The rating agency is concerned that Avation has not finalised a plan for the upcoming maturity, and Fitch believes that the company does not have sufficient liquidity to repay the unsecured bond in full in the next six months.
“The company's deteriorating credit profile and the wider challenges in the aviation sector have severely affected its funding access. Rent deferrals have weakened Avation's cash flow, despite the company benefiting from a loan repayment deferral granted by its lenders. Unrestricted cash amounted to $35 million at end-June 2020, against the remaining outstanding bond of US$342.6 million at end-November 2020, after the company repurchased $7.4 million of unsecured debt through the market at a deep discount.”
In October 2020, Avation obtained a waiver on a minimum tangible net worth/net debt ratio covenant that was in breach at end-June 2020, and the auditors expressed material uncertainty on the company's ability to continue as a going concern in relation to the extension or refinancing of the unsecured bond due in May 2021. That said, Avation continues to operate. It paid the interest as scheduled on the unsecured bond in November 2020. A debt restructuring appears highly likely because of the size of the bond coming due. Fitch states that it “would classify a debt restructuring as a distressed debt exchange if the restructuring imposes a material reduction in terms, compared with the original contractual terms, and is conducted to avoid bankruptcy, similar insolvency or intervention proceedings, or a traditional payment default”.
Fitch continues to expect a slow recovery for the aircraft leasing sector due to the dramatic decline in global air traffic as a result of the coronavirus pandemic. Due to this, Fitch states that Avation's asset risk has increased since its last review. All thirteen aircraft leased to Virgin Australia Holdings have been returned to Avation, more than originally anticipated by the company. The company has sold two Fokker 100 aircraft and entered operating leases for three ATR 72-500s with new airline customers in Australia and Asia. However, Fitch states that it “may take longer for the company to reposition or sell the remaining eight ATR72 aircraft in the challenging operating environment”. Avation also recognised an impairment loss of US$18.9 million on the aircraft formerly leased to VAH, and further impairments are expected to be recorded in coming quarters, says Fitch.
Avation has a 777-300ER leased to Philippine Airlines, which announced its restructuring in November 2020. Avation expects PAL to retain its B777-300ER with a substantial reduction in lease rent, but Fitch warns that the outcome is “uncertain” and that returning the aircraft would “severely affect Avation, as PAL accounted for 11% of Avation's monthly rent and the B777-300ER accounted for around 12% of its aircraft net book value”.
Fitch warns that a further downgrade on Avation's ratings would be triggered if “the company cannot refinance its senior unsecured notes and extend the debt maturity before May 2021, leading to an event of default. The beginning of a default or default-like process, the issuer entering into a standstill agreement, an execution of a distressed debt exchange, or an unexpected deterioration in the company's liquidity position which results in an event of default would also lead a negative rating action.”
Fitch does not expect any positive rating action unless and until the company successfully refinances its senior unsecured notes due in May 2021 when it would re-evaluate the company's credit profile after a refinancing, but warns that “the magnitude of any rating action would depend on the terms of the refinancing, the resolution of the PAL restructuring, the status of the aircraft returned by VAH and the performance of other airline customers”.