Standard & Poor’s (S&P) has revised Aviation Capital Group’s (ACG) outlook to stable from negative and affirmed its ratings on ACG, including the 'BBB-' issuer credit rating. S&P stated that ACG’s credit metrics were better than expected in 2020 despite the sharp decline in air traffic that caused many of its airline customers to request relief on lease payments, primarily rent deferrals. ACG’s credit metrics have also benefitted from lower-than-expected capital spending, and hence less debt, and refinancing debt at much lower interest rates.
The rating agency now expects the company's EBIT interest coverage and FFO to debt in 2021 to remain relatively consistent with 2020 levels but to improve in 2022 and beyond as air traffic recovers from the COVID-19 pandemic.
ACG's financial profile was somewhat better than S&P expected in 2020. Due to the unprecedented sharp decline in airline traffic in 2020 due to the COVID-19 pandemic, which resulted in airline lease restructurings or payment deferrals, ACG's revenues declined 12% and funds from operations (FFO) declined 15% from 2019 levels, compared with S&P’s previous expectations of around 30% and 40%, respectively. Despite approximately $250 million in incremental debt in 2020, ACG's interest expense declined due to refinancing higher-coupon debt at lower rates. As a result, its credit metrics were better than anticipated when S&P revised the outlook to negative in April 2020. This is due to a variety of reasons. The rating agency had modelled revenues on a cash basis, although realizing that actual revenue recognition would differ; however, most customers receiving concessions from ACG were deferring rentals rather than negotiating lower rates. Where ACG could reasonably project that it would recover the deferred rentals, either through repayment or applying security deposits against shortfalls, it recognized the contracted rents as revenues, despite cash deferrals. In addition, capital spending, and hence debt levels, were lower than expected due to manufacturer delays and negotiated deferrals of new aircraft deliveries. These all translated to better-than-forecast earnings, FFO, and credit measures.
S&P expects ACG's credit measures to remain relatively flat in 2021 but to improve thereafter as airline traffic and aircraft demand recovers, resulting in fewer lease deferrals, restructurings, and airline bankruptcies.