Moody’s Investors Service has upgraded the corporate family rating of Dubai Aerospace Enterprise (DAE) to Baa3 from Ba1, and the senior unsecured rating of subsidiary DAE Funding LLC to Baa3 from Ba2. This action concludes the review for upgrade initiated on November 8, 2019. The outlook is stable.
Firoz Tarapore, Chief Executive Officer of DAE said: “We have worked assiduously over the last two years to position our franchise to be rated as an investment grade company. We are delighted with this rating upgrade from Moody’s. DAE's senior unsecured debt is now rated investment grade by three major US credit rating agencies. This will enable us to further solidify our Top 10 franchise, accelerate our growth ambitions and strengthen our liquidity and capital position”.
Moody's states that it upgraded DAE's ratings to reflect the company's improving funding structure and liquidity, lower leverage, and further progress obtaining repayment of a large loan to its shareholder, the Investment Corporation of Dubai (ICD), an investing arm of the government of Dubai.
DAE has increased its funding diversity by issuing a higher proportion of unsecured debt and reducing encumbered assets, which strengthens the company's ability to efficiently finance and manage the composition of its fleet of commercial aircraft. DAE's ratio of secured debt to tangible assets declined to 27% at 30 September 2019 from 35% at 31 December 2018, in line with investment grade rated peers. DAE has increased its borrowing under unsecured revolving credit facilities that have availability periods of up to four years. The company has more than doubled its revolving credit borrowing capacity since mid-2018, extending its liquidity runway to levels comparable with well-positioned peers. Moody's expects that DAE will manage its debt maturities to avoid concentrations that could increase its refinancing risks.
Moody’s states that DAE has moderate leverage in relation to its fleet risks. The company's ratio of debt to tangible net worth was 2.7x at 30 September 2019, below the peer median of about 2.9x. Based on the company's strong cash flows, including from operations and trading activities, Moody's expects that DAE will continue to maintain adequate capital strength as it pursues modest fleet growth.
The Baa3 rating incorporates Moody's expectation that DAE will obtain repayment of its loan to its shareholder ICD. DAE received partial repayments totalling $700 million in 2019, reducing the receivable to about $800 million. Repayment of the remaining amount will strengthen DAE's quality of capital without materially affecting the company's leverage. Moody's continues to regard ICD's ownership of DAE as a benefit to DAE's operational stability and access to capital. Moody's has no particular governance concerns with respect to DAE and its shareholder.
Moody’s notes DAE's credit challenges, which include its less transparent aircraft investment and growth prospects compared to certain peers. In contrast to larger peers, DAE does not currently have new aircraft orders with aircraft manufacturers, relying instead on sale leaseback and trading activities to replenish its fleet. Additionally, new entrants into the aircraft leasing sector have increased competition for sale-leaseback transactions, pressuring returns. However, by foregoing new aircraft orders, DAE avoids the speculative lease-up and financing risk associated with long-dated capital acquisition commitments. With the support of ICD, DAE could explore alternate opportunities to grow its business, including through portfolio and platform acquisitions. A sustained increase in leverage or execution risk associated with such growth could be negative for the company's rating.
DAE's exposure to environmental risks is moderate, consistent with Moody's general assessment for airlines, aircraft leasing companies and aircraft asset backed securities. Pressure on airlines to limit emissions will likely grow over time, which will cause older, less fuel-efficient aircraft to decline in demand. Moody's expects that DAE will pursue aircraft investments that reflect the shifting operating priorities of airlines with respect to environmental concerns.
DAE's ratings reflect the company's asset and risk management strengths, the earnings and funding advantages associated with the company's unique access to capital and customers in the United Arab Emirates, and its balanced aircraft fleet composition. With a return on assets of 2.4% for the first three quarters of 2019, DAE's operating results compare well with rated peers in commercial aircraft leasing, whose average returns over the past three years have ranged between 1.7% and 2.6%.