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Rating Action:

Moody's confirms AerCap's Baa3 long-term senior unsecured rating, concluding review; outlook is negative

21 Sep 2020

New York, September 21, 2020 -- Moody's Investors Service, ("Moody's") has confirmed the Baa3 backed long-term issuer rating of AerCap Holdings N.V. (AerCap) and the Baa3 senior unsecured ratings of subsidiaries AerCap Ireland Capital D.A.C., AerCap Global Aviation Trust (senior unsecured shelf (P)Baa3) and International Lease Finance Corporation. The company's outlook is negative. This concludes Moody's review of AerCap's ratings initiated on 1 June 2020 to evaluate the impact of the global downturn in air travel on the company's credit profile.

The disruption in air travel globally is related to the coronavirus pandemic, which Moody's regards as a social risk under its environmental, social and governance (ESG) framework, given the substantial implications for public health and safety.

Confirmations:

..Issuer: AerCap Holdings N.V.

....Backed LT Issuer Rating, Confirmed at Baa3

....Backed Junior Subordinated Regular Bond/Debenture (Foreign Currency), Confirmed at Ba2 (hyb)

..Issuer: AerCap Ireland Capital D.A.C

....Backed Senior Unsecured Regular Bond/Debenture (Foreign Currency), Confirmed at Baa3

....Backed Senior Unsecured Shelf (Foreign Currency), Confirmed at (P)Baa3

..Issuer: AerCap Global Aviation Trust

....Backed Junior Subordinated Regular Bond/Debenture (Foreign Currency), Confirmed at Ba1 (hyb)

....Senior Unsecured Shelf (Foreign Currency), Confirmed at (P)Baa3

..Issuer: International Lease Finance Corporation

....Pref. Stock, Confirmed at Ba2 (hyb)

....Senior Unsecured Regular Bond/Debenture, Confirmed at Baa3

..Issuer: Delos Finance SARL

....Backed Senior Secured Bank Credit Facility (Foreign Currency), Confirmed at Baa2

..Issuer: ILFC E-Capital Trust I

....Backed Pref. Stock, Confirmed at Ba1 (hyb)

..Issuer: ILFC E-Capital Trust II

....Backed Pref. Stock, Confirmed at Ba1 (hyb)

Outlook Actions:

..Issuer: AerCap Holdings N.V.

....Outlook, Changed To Negative From Rating Under Review

..Issuer: AerCap Ireland Capital D.A.C

....Outlook, Changed To Negative From Rating Under Review

..Issuer: AerCap Global Aviation Trust

....Outlook, Changed To Negative From Rating Under Review

..Issuer: International Lease Finance Corporation

....Outlook, Changed To Negative From Rating Under Review

..Issuer: Delos Finance SARL

....Outlook, Changed To Negative From Rating Under Review

..Issuer: ILFC E-Capital Trust I

....Outlook, Changed To Negative From Rating Under Review

..Issuer: ILFC E-Capital Trust II

....Outlook, Changed To Negative From Rating Under Review

RATINGS RATIONALE

Moody's has confirmed AerCap's long-term ratings after considering the company's strengthened liquidity position and effective liquidity management during the downturn in the commercial aviation sector, its large and diverse fleet and base of airline customers, and improved capital cushion. AerCap's history of strong profitability and cash flow, as well as its superior competitive positioning within the commercial aircraft leasing sector underscore its solid performance prospects once air travel volumes and leased aircraft demand rise in connection with a recovery in the aviation sector, which Moody's estimates will occur in 2023. Credit challenges include AerCap's higher investment in less-liquid widebody aircraft than most peers, debt-to-equity leverage above the median of investment grade rated peers, and the severe downturn in the aviation sector that has resulted in lower demand for leased aircraft as well as increased risks to earnings, cash flow, liquidity and capital position.

In recent months AerCap has bolstered its liquidity cushion in response to the downturn in the aviation sector and in light of the company's sizeable debt maturities and aircraft purchase commitments. As of 30 June 2020, AerCap reduced capital expenditure commitments by $2.6 billion in 2020 and $2.7 billion in 2021, raised $3 billion in new funding including through two senior notes issuances of $1.25 billion each, tendered for $1.5 billion of outstanding debt and redeemed early its $1 billion notes maturing in October. On a 31 August 2020 pro forma basis, Moody's estimates that AerCap has over 230% liquidity coverage of liquidity uses (12 months), which is a significant improvement from Moody's estimated coverage of approximately 150% at 1 June 2020 when the company's ratings were placed on review. Still, as of 30 June reflecting debt tenor, AerCap has sizeable maturities of senior unsecured debt of approximately $3.2 billion in 2021 and $3.9 billion in 2022, which together with purchase commitments of $2.2 billion and $3.0 billion in 2021 and 2022, respectively, represent significant demands on the company's liquidity resources. Aercap has availability under two multi-year revolving credit agreements totaling $4.95 billion and also has about $1.0 billion of availability under secured facilities to fund its fleet and capital expenditures. AerCap ended Q2 2020 with about $27 billion of unencumbered aircraft, which provide an important source of secondary liquidity support, even though the decline in aircraft values and trading levels during the downturn have reduced their liquidity. Moody's expects that AerCap will continue to prioritize maintaining strong liquidity above its normal target of 1.2x coverage for the duration of the downturn in the aviation sector.

A credit challenge for AerCap and other aircraft leasing companies is navigating the unprecedented decline in the aviation sector that has accompanied the global coronavirus pandemic. Moody's expects that air passenger demand will recover strongly toward 2019 levels during 2023, but during the interim weak airline performance will result in higher lease defaults and lower leased aircraft utilization and lease rates, negatively affecting lessors' rental revenues, earnings and cash flows through 2022. As a result of these challenges, Moody's has lowered its assessment of aircraft lessors' operating environment to Ba1 from Baa2 to reflect lower expected industry stability.

Lessors have accommodated airlines by agreeing to short-term deferrals of a portion of lease payments in exchange for repayment with interest on an agreed schedule. As of 30 June 2020, AerCap had agreed with airline customers to temporarily defer rental collections of about $430 million, which represented about 9% of the company's annual lease revenues. Moody's expects that many weakened airlines will press for extensions of existing rent deferral agreements and repayment schedules, extending the temporary weakening of AerCap's operating cash flow. Revenue declines associated with defaulted leases and the increased difficulty of redeploying aircraft into alternate lease arrangements given the weak demand environment will further weaken operating cash flows until leased aircraft demand strengthens as air travel volumes recover.

In recent years, AerCap has reduced its residual risk exposure on older and out of production aircraft, but it maintains a more significant investment in less liquid wide-body aircraft than most peers, which increases its overall lease residual risks compared to lessor fleets with a higher proportion of more liquid narrow-body aircraft. At 30 June 2020, 49% of AerCap's fleet by net book value were wide-body aircraft, though Moody's estimates that over 60% of these are younger than five years in age, including popular Boeing 787 and Airbus A350 models, and are subject to leases that mature after the anticipated 2023 recovery in the aviation sector, which are important risk offsetting considerations. AerCap's $37.2 billion fleet of 931 aircraft at 30 June 2020 had an average age of 6.4 years which compares to a rated peer median of 6.3 years and an average remaining lease term of 7.3 years, which is above the rated peer median of 6.8 years. Because of the longer average lease terms of AerCap's fleet, Moody's estimates that the proportion of AerCap's fleet with leases maturing during the downturn is materially lower than other rated aircraft leasing companies. This results in proportionately less rent revenue roll-off during the downturn compared to peers and less aircraft remarketing risk during distressed sector conditions, even considering anticipated revenue deterioration from lease defaults. However, a relatively high proportion of leases maturing during the downturn relate to less liquid wide-body and older vintage aircraft, increasing remarketing risks. Overall, Moody's expects that downside risks to AerCap's revenues, cash flow and earnings should be manageable.

AerCap has an adequate capital cushion, though certain peers maintain lower leverage. AerCap's ratio of debt to tangible net worth (including Moody's adjustments) was 3.1x at 30 June 2020, which is higher than the investment-grade peer median of 2.8x; on a net-debt basis the ratio measures 2.8x. By AerCap's own measure, the company's leverage declined to 2.5x at quarter end, lower than its target of 2.7x. In Moody's view, AerCap has less cushion to absorb deterioration in aircraft values that could result in impairment charges compared to certain of its peers. An offsetting consideration is Moody's expectation that AerCap will generate strong cash flows once the recovery in air travel demand brightens prospects for new aircraft investment and leasing opportunities.

Moody's expects that leasing will remain an important source of aircraft acquisition capital for the airline industry and that recovery will provide new leasing opportunities that will help to revive AerCap's cash flows and earnings. AerCap has a strong history of committing its aircraft into productive leases well in advance of delivery of new aircraft and maturity of leases on existing owned and managed aircraft. Moody's expects that AerCap will be able to generate operating results that support its current ratings as the recovery strengthens in 2023.

A credit strength recognized in AerCap's ratings is its strong competitive position as the largest lessor globally, which provides benefits in terms of relationships with airlines and aircraft manufacturers. Because of its global scale and well-established marketing, risk management and technical abilities, AerCap is able to pursue more complex, higher yielding lease transactions and to respond more proactively when airline customers fall behind in rental payments compared to smaller, less established competitors, in Moody's view.

AerCap's negative outlook reflects Moody's expectations of a more extended and weaker recovery in air travel that results in higher risks to earnings, cash flow, liquidity and capital positions.

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's rating action reflect the negative effects on AerCap of the breadth and severity of the shock, and the deterioration in credit quality, profitability, capital and liquidity it has triggered.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

A ratings upgrade is unlikely over the next 12-18 months, given the negative outlook, but AerCap's ratings could be upgraded if: 1) AerCap generates consistently stronger and more stable profitability and cash flow ratios compared to peers, 2) the company continues to demonstrate effective liquidity management during the aviation sector disruption as well as post-recovery, 3) fleet residual value risks and composition are well managed including through the downturn, and 4) the company's debt-to-tangible net worth leverage ratio declines to less than 3.0x.

AerCap's ratings could be downgraded if: 1) liquidity in relation to expenditures and debt maturities (one-year horizon) declines to less than 150%, 2) revenues weaken and costs increase to the extent that the company will be unable to generate materially positive profits and operating cash flow by the end of 2023; 3) debt-to-equity leverage increases more than Moody's expects due to high impairment charges; 4) the company's competitive positioning otherwise weakens.

The principal methodology used in these ratings was Finance Companies Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187099. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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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