Global aircraft lessors' Q1 financial results confirm issuers' efforts to maintain sufficient liquidity to navigate COVID 19 have been successful says ratings agency Fitch.
The pandemic has caused significantly reduced passenger air travel, aircraft utilisation rates, lease collections and cash flows. However, Fitch continues to believe that lessors have sufficient headroom within current ratings.
Rated lessors should withstand Fitch's base case scenario without breaching leverage or liquidity downgrade triggers, given reduced purchase commitments, manageable debt maturities over the next 12 months, and, in some cases, recent draws on available borrowing capacity.
Fitch revised its global aircraft leasing sector outlook to Negative from Stable on March 16 and took negative rating actions on aircraft lessors on March 23. Key near-to-medium term rating sensitivities, aside from liquidity management, include the pandemic's effect on operating cash flow given increased lease deferrals and/or defaults, the impact of potential airline bankruptcies, aircraft repossessions and higher potential leverage due to impairments.
Fitch-rated aircraft lessors reported that nearly 90% of airlines have requested rent deferrals. However, deferrals have only been granted to a select number and typically for two to three months, with payback following the deferral period, including interest. For rated lessors, contracted rent deferrals ranged from 2%-12% of annual rental revenues, which Fitch believes is manageable.
A second round of rent deferral requests is possible, depending on the length of lockdown measures and the pace of travel demand recovery, which would further impair aircraft lessor operating cash flow generation in 2H20.
Some lessors have drawn on bank revolvers, while most have cancelled nearly 40% of near-term orders for unplaced aircraft to shore up liquidity and reduced near-term funding needs, which Fitch views as a credit positive. Issuers have sufficient liquidity to withstand near-term reductions in financing availability and lease cash flows amid the declines in air traffic.
As of March 31, 2020, aggregate liquidity sources of rated aircraft lessors covered uses by approximately 1.6x, representing a sufficient cushion relative to Fitch's 1.0x downgrade trigger, although continued deferrals and defaults will reduce liquidity cushions. Only Voyager Aviation Holdings and Avation plc (rated 'B'/RWN) have reported ratios below 1.0x.
Fitch says that while an increase in aircraft repossessions could reduce residual values, resulting in impairment charges but so far none have yet been reported by rated lessors.