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Rating Action:

Moody's downgrades Fly Leasing's long-term senior unsecured rating to B3 from B1, citing weaker than expected liquidity, concluding review; outlook is negative

25 Sep 2020

New York, September 25, 2020 -- Moody's Investors Service, ("Moody's") downgraded its ratings for Fly Leasing Limited (FLY) and its subsidiaries, including the company's Corporate Family Rating (CFR) to B1 from Ba3 and its long-term senior unsecured rating to B3 from B1. The senior secured bank credit facility rating for Fly Funding II S.a.r.l. were also downgraded to Ba3 from Ba2. These rating actions conclude the review for downgrade initiated on 4 June 2020 to evaluate the impact of the global downturn in air travel on the company's credit profile. The outlook is negative.

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.

"FLY does have substantial unencumbered assets and cash to address its $325 million senior unsecured notes maturing in October of next year but anticipated decline in earnings and cash flow will further pressure its already levered financial risk profile" said Inna Bodeck, a vice president at Moody's Investors Service.

Downgrades:

..Issuer: Fly Leasing Limited

....LT Corporate Family Rating, Downgraded to B1 from Ba3

....Senior Unsecured Regular Bond/Debenture (Foreign Currency), Downgraded to B3 from B1

..Issuer: Fly Funding II S.a.r.l.

....Backed Senior Secured Bank Credit Facility (Foreign Currency), Downgraded to Ba3 from Ba2

Outlook Actions:

..Issuer: Fly Leasing Limited

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

..Issuer: Fly Funding II S.a.r.l.

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

RATINGS RATIONALE

Moody's downgraded FLY's corporate family rating to B1 from Ba3 due to the pressure on the company's current liquidity position associated with the need to address its upcoming notes maturity in October 2021. FLY's rating continues to reflect its improved fleet composition, benefiting from the company's sale of older aircraft and acquisition of newer models, resulting in reduced aircraft remarketing and residual risks. Additionally, the majority of FLY's fleet is comprised of narrow-body aircraft used primarily in domestic travel, which, Moody's believes, has better prospects of improved utilization rate overtime as the domestic travel recovers. Moody's currently expects that air passenger demand will recover strongly toward 2019 levels during 2023. Nonetheless, the company does have a fair amount of aircraft (approximately 26% of the entire fleet as at 30 June 2020) coming up for renewal by the end of 2021, creating uncertainty around the company's ability to re-lease some of its older aircraft. This, in turn, increases the downside risks for FLY's revenues, earnings and cash flow.

As such, Moody's anticipates that FLY's debt-to-EBITDA leverage (6.8x for the last 12 months ending 30 June 2020 incorporating Moody's standard adjustments) will remain high as the earnings slightly decline with the shrinking aircraft fleet. FLY's experienced external manager BBAM Limited Partnership (BBAM) remains a source of operational and remarketing strength for FLY, although its management relationships with Incline Aviation Fund and Nomura Babcock and Brown Co., Ltd. (Nomura Babcock & Brown) create conflict of interest concerns.

FLY's ratings also reflect its high airline lessee concentrations and greater reliance than previously anticipated on confidence sensitive secured funding that encumbers its assets. At 30 June 2020, FLY's top ten airline customers comprised approximately 62% of the carrying value of its fleet, whereas its larger competitors' customer concentration ranged more favorably from 30% to 45%, as at the same reporting date.

FLY has a good liquidity position supported by existing cash ($289 million as of 30 June 2020) and Moody's anticipates free cash flow of approximately $220 million over the next 12 months. These cash sources provide good coverage of the $170 million required annual term loan amortization and other expenses, including $23 million cash collateral potentially required to be posted under its residual value guarantee agreements. Moody's expects FLY's upcoming October 2021 unsecured notes maturity, along with term loan's and Magellan facility's capital calls will put the company's liquidity position under pressure. This in turn will create greater reliance on the repayment of rent deferrals in the amount of approximately $50 million by the end of 2021 as anticipated by FLY. The company does not currently have any external committed revolving facilities.

Aircraft 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. FLY had agreed with airline customers to temporarily defer rental collections totaling $83 million at 30 June 2020, which represented about 20% of FLY's rental revenues for the previous 12 months. Moody's expects that many weakened airlines will press for extensions of existing rent deferral agreements and repayment schedules, extending the temporary weakening of FLY'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.

A credit challenge for FLY 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 credit challenges, Moody's has lowered its assessment of aircraft lessors' operating environment to Ba1 from Baa2 to reflect lower expected industry stability.

Moody's does expect 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 cash flows and earnings. Airlines focused on capital efficiency will likely see value in leasing lower-cost mid-life narrow-body aircraft as air travel demand recovers, particularly if fuel costs remain low, which should benefit demand for FLY's fleet and strengthen its earnings and cash flow prospects, once the recovery in air travel is more established.

Moody's downgraded senior unsecured notes by two notches to B3 from B1, and the CFR by one notch to B1 from Ba3, recognizing weakened asset coverage.

The negative outlook reflects Moody's expectation that FLY's earnings and liquidity could weaken more than anticipated in a challenging near-term operating environment. It also incorporates the assumption that FLY will refinance over the next three months its senior unsecured notes maturing in October 2021 and that the company will collect the majority of its deferral payments by the end of 2021.

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 FLY 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

The ratings could be downgraded if the company: 1) experiences higher than expected deterioration in its topline and earnings; 2) reduces its liquidity cushion through higher than expected loans' capital calls, further payment deferrals or other cash needs; 3) is unable to refinance its senior unsecured notes over the next three months; or 3) experiences deterioration in other key metrics, including tangible equity / tangible assets decline to less than 20%, stemming from challenging economic conditions.

The ratings could be upgraded if the company is able to exhibit sustainability of its earnings structure by consistently renewing its upcoming leases and maintaining its current scale, and is able to maintain good liquidity profile.

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.

Inna Bodeck
Vice President - Senior Analyst
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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