KBRA affirms the BBB+ issuer rating and senior unsecured debt rating of Avolon Holdings as well as the BBB+ ratings on the senior unsecured notes issued by Park Aerospace Holdings and Avolon Holdings Funding. The rating Outlook is changed to Stable from Negative.
KBRA stated that the change in Outlook to Stable reflected the significant recovery in passenger air travel in 2021, especially in various domestic markets, as well as Avolon’s stable capital and liquidity metrics through the severe pandemic-driven downturn, despite a greater decline in earnings metrics and higher impairments relative to higher-rated peers. Avolon demonstrated robust access to capital markets, effectively managed lease deferrals and defaults, and successfully remarketed aircraft to reduce off-lease aircraft and limit impairments while maintaining stable leverage and liquidity levels.
The rating agency notes that aircraft lessors still face headwinds including potential regional disruptions in air traffic recovery and impacts from the Russia-Ukraine conflict, however, Avolon’s exposure to Russian lessees is low at 1.65% of fleet net book value (NBV).
KBRA views Avolon as well-positioned to manage future challenges given its management expertise, strong capital base and solid liquidity. Given the difficulty lessors face in repossessing aircraft from Russia, the crisis could cause impairments and reduced cash flow, however, KBRA believes the potential impact to Avolon’s credit metrics is minimal even in a hypothetical worst-case scenario of a full write-down of the 1.65% NBV Russian exposure. In addition, the Company’s significant available liquidity of $6.3Bn at Dec. 31, 2021, is adequate to absorb the cash flow interruption and potential impact on leverage from impairments on aircraft in Russia. KBRA notes that Avolon holds maintenance reserves and security deposits against these aircraft and has contingent insurance policies that cover war risk, although insurance claims may take time to resolve.
Avolon’s senior unsecured debt rating is the same as the issuer rating reflecting adequate coverage of unsecured debt by unencumbered assets which supports unsecured recovery prospects. The senior unsecured notes issued by Avolon Holdings Funding and Park Aerospace, direct wholly-owned subsidiaries of Avolon, have an unsecured guarantee from Avolon.
A ratings upgrade in the near-term is not expected given the challenges the industry currently faces, added KBRA.