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Rating Action:

Moody's assigns a first-time Ba2 corporate family rating to Air Transport Services Group; outlook stable

13 Jan 2020

New York, January 13, 2020 -- Moody's Investors Service, ("Moody's") has assigned new ratings to Air Transport Services Group, Inc. (NASDAQ: ATSG), including a Ba2 Corporate Family Rating (CFR) and a Ba3 rating to the company's proposed senior unsecured notes due 2028, issued by subsidiary Cargo Aircraft Management, Inc. (CAM). The outlook for both entities is stable.

The following rating have been assigned:

Air Transport Services Group, Inc.:

Corporate Family Rating, assigned Ba2

Outlook, assigned stable

Cargo Aircraft Management, Inc.:

$400 million senior unsecured notes due 2028, assigned Ba3

Outlook, assigned Stable

RATINGS RATIONALE

ATSG's Ba2 CFR is supported by its position as one of the leading providers of air cargo fleet leasing and related services, including crew, maintenance and insurance (CMI) services. The rating is also supported by ATSG's good earnings growth, solid operating execution exhibited by high margins and a good liquidity profile, and a funding structure that is augmented by the new senior unsecured notes issuance. Credit challenges include ATSG's high customer concentrations and negative tangible equity, which limits the company's ability to absorb unexpected losses in the event of deteriorating economic or operating conditions.

ATSG engages in diverse business activities that strengthen its competitive position within the cargo aircraft leasing sector. ATSG's aircraft leasing, conducted through CAM, provides strong predictable earnings and cash flows from the company's fleet of 92 aircraft as at 30 September 2019. Leasing accounts for about two thirds of ATSG's consolidated pre-tax earnings. 74 of ATSG's aircraft are freighters, ranking the company as the largest lessor of cargo aircraft globally. ATSG's leasing generates free cash flows that tend to be countercyclical because the company can curtail fleet expansion when customer demand softens. Additionally, lease expirations on the company's aircraft are well distributed over a number of years and in any given year are manageable. ATSG is implementing an aircraft investment strategy that Moody's expects will continue to result in strong demand and high utilization of its fleet.

Through its ACMI (aircraft, crew, maintenance, and insurance) segment, ATSG provides ACMI, CMI and charter services through three airline subsidiaries, two of which (ABX Air and Air Transport International) specialize in cargo transport and one (Omni Air International) in passenger transport. Earnings from this segment account for approximately 23% of ATSG's consolidated pre-tax earnings. The remaining 12% of ATSG's pre-tax earnings are generated through several subsidiaries that provide aircraft maintenance, aircraft conversions, and other operating and leasing services. In Moody's view, ATSG's breadth of services strengthens its relationships with customers that desire to outsource many of their critical air cargo transport and related service requirements.

A key credit challenge is ATSG's concentrated customer relationships with Amazon, DHL and the US Department of Defense, which together accounted for about 70% of ATSG's total revenues in the first three quarters of 2019. A loss of any of these key relationships would have significantly negative consequences for ATSG's financial condition. This concern is offset by the high credit quality of these customers, their long-term need for the essential services that ATSG provides, and the strength of their relationships with ATSG. Additionally, the multi-year nature of the contractual arrangements with Amazon and DHL means that revenue losses could occur only gradually over time.

A further credit challenge is ATSG's negative tangible capital position, reflecting nearly $500 million of goodwill associated with the company's acquisition of Omni Air. As a result, ATSG's debt to tangible net worth leverage does not compare well with the current 2.9x median for Moody's rated aircraft leasing companies. In contrast, ATSG's ratio of debt to EBITDA, which measured 3.7x at 30 September 2019 (last twelve months, incorporating Moody's standard adjustments and pro-forma for the acquisition of Omni Air) is stronger than most aircraft leasing companies, reflecting the strength of ATSG's operating margins. Moody's expects that ATSG's debt to EBITDA leverage will slightly decline and its debt to tangible net worth to significantly improve as the company strengthens earnings. Moody's further expects that ATSG will utilize its cash flow to appropriately balance fleet growth with measures to strengthen its financial position over coming periods.

ATSG has a good liquidity position anchored by predictable operating cash flow and availability under a $750 million secured revolving credit facility, pro forma for repayments from proceeds of the proposed senior notes offering. The company currently pays no dividend, which enhances its flexibility. The company's new senior notes issuance increases its funding diversity and reduces its secured debt reliance, but further diversification of funding that reduces encumbered assets would be positive for the company's credit profile.

Moody's has rated ATSG's senior notes one notch lower than the CFR, reflecting the notes' relative priority and proportion in ATSG's capital structure, and the strength of the notes' asset coverage. The notes will be guaranteed on a senior unsecured basis by ATSG and certain restricted subsidiaries of ATSG. The indenture will include certain covenants restricting ATSG's ability to, among other things, incur additional debt, pay dividends, create certain liens, merge and sell assets. ATSG intends to use the proceeds of the notes to repay debt outstanding under its secured revolving credit facility and issuance expenses.

The stable outlook reflects Moody's expectations of growth of 6%-8% in the next 18 months while maintaining current profitability. It also anticipates that ATSG will continue to successfully integrate the acquisition of Omni as well as achieve reduction in debt / EBITDA leverage to less than 3.5x and a strengthening of tangible capital.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Moody's could upgrade ATSG's ratings if the company achieves and maintains profitability measured as the ratio of net income to average assets that is stronger than peer average, significantly strengthens its tangible equity to tangible assets ratio while maintaining debt to EBITDA leverage of less than 3.5x, and effectively manages its customer concentrations.

Moody's could downgrade ATSG's ratings if the company's operating results deteriorate, its capital or liquidity profiles weaken as a result of debt-financed acquisitions or shareholder dividends, or if the company loses a material customer or suffers a business disruption that weakens its financial prospects.

Headquartered in Wilmington, Ohio, ATSG had $2.7 billion in total assets and managed a fleet of 92 aircraft at 30 September 2019. ATSG has been a publicly traded company since 2007.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Finance Companies Methodology published in November 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Mark L. Wasden
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Ana Arsov
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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