Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) and revised the rating outlook for Avolon Holdings and its subsidiaries to Positive from Stable.
Avolon Holdings subsidiaries include Avolon Holdings Funding Limited, Park Aerospace Holdings Limited, Avolon TLB Borrower 1 (Luxembourg) S.a.r.l. and Avolon TLB Borrower 1 (US) LLC.
In addition, Fitch has affirmed the senior secured debt issued by Avolon's various wholly-owned subsidiaries at 'BBB' and senior unsecured debt at 'BBB-'. Fitch has also assigned expected ratings of 'BBB(EXP)' to the incremental term loan B-6 tranche co-issued by Avolon TLB Borrower 1 (Luxembourg) S.a.r.l. and Avolon TLB Borrower 1 (US) LLC.
Fitch believes Avolon's asset quality metrics have been solid, supported by the benign economic backdrop and the absence of material exogenous shocks prior the pandemic. During the pandemic, the company recorded approximately $108 million of impairments (0.5% of net book value) in FY20, arising from the writedown of current technology widebody aircraft.
Avolon's core operating performance has improved in line with a recovery in global aviation, supported by post-pandemic pent-up demand. In 1Q23, Avolon reported annualized pre-tax income of $64 million, up from a loss of $202 million a year prior. This translated to pre-tax return on average assets of 0.8% compared to a loss of 2.6% during the same period and modestly above the average of 0.7% from 2019-2022.
As of March 31, 2023, Avolon had $5.5 billion of liquidity comprised of cash on hand, committed borrowing capacity, and projected operating cash flow over the next 12 months. These sources of liquidity covered the next 12 months of expected capital expenditures and debt maturities of $3.9 billion by 1.7x, which is among the strongest coverage ratios of its peers. Fitch believes Avolon's liquidity management and OEM backlogs support strong liquidity coverage over the near term. As manufacturer production delays abate, Fitch expects liquidity coverage ratios for Avolon remain at or above 1.2x over time.