New York, December 18, 2009 -- Moody's Investors Service downgraded the senior unsecured rating
of International Lease Finance Corporation (ILFC) to B1 from Baa3 and
its short-term rating to Not Prime from Prime-3.
The outlook for the ratings is negative. This concludes Moody's
review of ILFC's ratings first initiated on July 31, 2009.
The downgrade reflects Moody's view that support from ILFC's
parent, American International Group Inc. (AIG), has
diminished both in terms of quality and duration. As a result,
with this rating action the rating uplift from ILFC's stand-alone
credit profile attributed to AIG support is reduced from multiple notches
to one notch. Moody's views ILFC's stand-alone
credit profile as consistent with a mid-B rating, driven
primarily by liquidity constraints.
The duration of AIG's support of ILFC is relatively certain through
November 2010, given AIG's statements to this effect in its
financial filings with the SEC. Moody's views AIG's
near-term support as a critical bridge that reduces the risks associated
with ILFC's efforts to address short-term liquidity issues
and transition towards a more stable funding profile. However,
Moody's believes longer-term support from AIG is less certain
because of ILFC's diminished strategic importance to AIG.
In Moody's view, the quality of AIG's support of ILFC
has weakened. As a reflection of this, Moody's anticipates
that ILFC will likely need to record losses as it sells aircraft assets
to generate cash to service debt maturities, in lieu of injections
from AIG. In contrast, previous to the onset of financial
stress at AIG, Moody's believes that AIG would have supported
ILFC, avoiding such losses.
"We think AIG's support mitigates potentially more severe
near-term illiquidity at ILFC while the firm tackles coming debt
maturities," said Moody's senior analyst Mark Wasden.
"ILFC needs to transition to funding that is better matched to its
asset profile, and it will need AIG's support to accomplish
this," Wasden added.
Moody's said that ILFC's rating also reflects its weakened
credit profile and inadequate funding structure, resulting from
the mismatch between the maturity profile of the firm's assets and
liabilities. ILFC has significant debt maturities over the next
few years that exceed its traditional liquidity resources. The
firm is currently unable to economically issue unsecured debt, traditionally
the backbone of its funding, in volumes sufficient to refinance
maturating debt. Additionally, ILFC has no un-drawn
capacity under its bank facilities.
Moody's expects that ILFC will pursue liquidity actions over the
next several quarters to address its funding mismatch, including
issuing secured debt and selling some assets. Though necessary,
Moody's believes these actions will ultimately reduce ILFC's
financial and operational flexibility. Additionally, these
actions carry significant execution risk, which constrains the firm's
ratings.
Moody's believes ILFC's franchise strengths are supportive
of its efforts to repair its funding profile. ILFC's position
as a leading player in the aircraft leasing industry has provided it with
near-unrivaled purchasing power with Boeing and Airbus and access
to global air carriers. The firm's fleet is comprised of
high quality, relatively young and in-demand aircraft that
have on average suffered less deterioration in value than older vintage
aircraft. In addition, Moody's expects that ILFC's
operating cash flow will hold up well even after incorporating cyclical
pressures on lease rates and utilization. ILFC will take delivery
of fewer new aircraft over the next few years, which reduces the
burden on the company's cash resources and its order book in later
years includes new aircraft such as Boeing's 787 that should preserve
its reputation as a provider of the most sought-after aircraft
to the global airline industry.
However, while ILFC's size and market presence are strategic
strengths, they are also fundamental weaknesses. ILFC is
exposed to very large and ongoing funding requirements that may not be
fully accommodated during periods of market contraction. In Moody's
view, ILFC is unlikely in the foreseeable future to have the level
of financial flexibility and access to unsecured debt that it previously
had under ownership by a stronger AIG.
Moody's noted that ILFC's current liquidity initiatives could
result in a decrease in the firm's leverage over the next few years.
An improved capital cushion could aid the firm's efforts to re-engage
debt investors. However, uncertainty regarding the firm's
eventual ownership works against its efforts to attract new capital and
is a factor in the rating analysis. Additionally, it is unclear
whether a low leverage strategy will generate sufficient returns to attract
equity capital to effect a transition of ownership of the firm.
If ILFC's actions to repair its liquidity profile and access new
capital sources are successful, while also preserving key franchise
strengths and generating attractive returns, the firm's stand-alone
credit profile could improve. ILFC's ratings will also incorporate
the effects of any change in ownership, including any support provided
by a new owner.
The outlook for ILFC's long-term ratings is negative,
reflecting the substantial execution risks associated with the firm's
liquidity initiatives in an as-yet unstable funding and operating
environment. The negative outlook also recognizes the probable
negative pressures on ILFC's revenues and expenses associated with
the economic downturn, and its effects on the firm's airline
customers. A stable outlook could follow if ILFC makes meaningful
progress towards a stabilization of its liquidity profile and operating
conditions improve.
Ratings affected by today's action include:
International Lease Finance Corp.:
Senior Unsecured: to B1 from Baa3
Short-term: to Not Prime from Prime-3
Preferred Stock: to B3 from Ba2
ILFC E-Capital Trust I:
Preferred Stock: to B3 from Ba2
ILFC E-Capital Trust II:
Preferred Stock: to B3 from Ba2
In its last rating action, on July 31, 2009, Moody's
downgraded ILFC's senior unsecured rating to Baa3 from Baa2 and its short-term
rating to Prime-3 from Prime-2 and placed ILFC's ratings
on review for further possible downgrade.
The principal methodology used in rating ILFC is Analyzing the Credit
Risks of Finance Companies, which can be found at www.moodys.com
in the Rating Methodologies sub-directory under the Research &
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating these issuers can also be found in
the Rating Methodologies sub-directory.
International Lease Finance Corporation, headquartered in Los Angeles,
California, is a major owner-lessor of commercial aircraft.
New York
Mark L. Wasden
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Robert Young
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades ILFC to B1 with a negative outlook