KBRA Affirms Air Lease’s A- Issuer, Senior Unsecured Debt Ratings and BBB Preferred Share Rating with Stable Outlook and Assigns A- Rating to Air Lease’s Medium-Term Notes

Rhea-AI Summary

KBRA affirms A- issuer and senior unsecured debt ratings for Air Lease and assigns A- rating to Medium-Term Notes. The ratings reflect AL's strong financial fundamentals, young fleet, diverse customer base, and access to capital markets. Despite industry challenges and key-man risk, AL's Stable Outlook is supported by its resilient performance during the pandemic and favorable industry dynamics.

Financial Analyst

The affirmation of Air Lease Corporation's issuer and senior unsecured debt ratings by KBRA, alongside the stable outlook, signals to investors a perceived reliability and creditworthiness of the company in the medium term. The A- rating reflects a balance between strong financial fundamentals, such as liquidity and cash-flow metrics and the risks inherent in the cyclical nature of the aviation leasing industry. The company's strategy of maintaining low leverage, at around 2.5x Debt-to-Equity, is noteworthy as it suggests a conservative financial posture, although the current 2.8x ratio indicates a slight deviation from this target.

From an investment perspective, the stable outlook and access to capital markets at attractive rates could be seen as positive indicators for potential investors. However, the cyclical nature of the industry and reliance on wholesale funding are factors that require careful consideration, as they could affect the company's performance in the event of an industry downturn. Additionally, the recent significant write-down of aircraft detained in Russia highlights geopolitical risks that can have a material impact on the company's financials.

Market Research Analyst

The global aircraft leasing industry is characterized by its sensitivity to economic cycles and geopolitical events, as evidenced by Air Lease Corporation's recent experience with aircraft detained in Russia. The company's young and in-demand fleet, as well as its solid orderbook, provide visibility for future growth and suggest a strategic positioning to capitalize on the favorable industry dynamics, such as the current strong demand for air travel paired with limited aircraft supply.

Investors should consider the potential for increased delinquencies or defaults among airline customers in the event of an economic downturn or other adverse events, as this could directly impact Air Lease's profitability and liquidity. The stable outlook, however, does provide some assurance of the company's ability to weather such challenges, as it has done through the pandemic and subsequent market recovery.

Legal Expert

The equalization of the A- rating for the Sukuk trust certificates with Air Lease Corporation's senior unsecured debt rating is a legal acknowledgment of the company's irrevocable obligations under its purchase undertaking. This legal structure ensures that payments are met following certain dissolution events, which provides a level of security to investors. The BBB rating for the preferred shares, being two notches lower, reflects their deeply subordinated nature and the discretionary aspect of dividends, which are important considerations for investors seeking to understand the risk profile of different investment instruments within the company.

For stakeholders, the 75% equity credit for preferred shares indicates a degree of loss absorption that could potentially shield senior creditors in adverse scenarios. This structural feature is an essential legal aspect that could influence investor decisions, particularly for those assessing the risk-return profile of subordinated instruments compared to senior debt.

NEW YORK--(BUSINESS WIRE)-- KBRA affirms the A- issuer and senior unsecured debt ratings as well as the BBB rating for the preferred shares for Air Lease Corporation (NYSE: AL, “the Company”), a global aircraft leasing company based in Los Angeles, California. KBRA also affirms the A- rating of the Sukuk trust certificates issued by Air Lease Corporation Sukuk Limited. In addition, KBRA assigns a senior unsecured rating of A- to €600.0 million 3.70% Medium-Term Notes, Series A, due April 15, 2030. The Outlook of the ratings is Stable.

Key Credit Considerations

The issuer and senior unsecured ratings of Air Lease are driven by the company’s global franchise, leading market position and highly experienced management team with deep relationships with airlines and OEMs. Air Lease’s credit profile is further supported by strong financial fundamentals, as reflected in its strong profitability, liquidity, and cash-flow metrics, and its almost entirely unencumbered asset base. The ratings also consider Air Lease’s young and in-demand fleet, diverse customer base, solid orderbook providing visibility for future growth, and substantial forward lease placement of orders. AL has excellent access to the capital markets as demonstrated by their issuance activities in the past couple of years in a challenging market environment. The Company maintains a low leverage strategy targeting around 2.5x Debt-to-Equity, although leverage was slightly higher at 2.8x Debt-to-Equity as of December 31, 2023, due to the significant write-down of aircraft detained in Russia in 2022. The 2.8x Debt-to-Equity ratio takes into account 75% equity credit consideration by KBRA for the preferred shares. KBRA expects AL’s leverage to return to historic norms in the near to medium term through retention of profits. The ratings are balanced by the disciplined funding and placement planning required to manage the significant orderbook, an element of key-man risk despite good succession planning, the cyclical nature of the industry, potential credit issues of its airline customers, and event risks related to air travel.

The A- rating of the Sukuk trust certificates is equalized with AL’s senior unsecured debt rating based on AL’s irrevocable obligations under its purchase undertaking to provide necessary funds to ensure payments of principal and periodic distribution amounts are met following the occurrence of a Dissolution Event (which does not include a Total Loss Dissolution Event) and AL’s obligations under the purchase undertaking and servicing agency agreement ranking pari-passu with AL’s other senior unsecured obligations. The BBB rating of the Preferred Shares is two notches lower than the senior unsecured rating reflecting the deeply subordinated features of the preferred shares indicated by their ranking in the capital structure, their discretionary and non-cumulative dividend feature, and their perpetual nature. The 75% equity credit indicates that the preferred securities are highly loss-absorbing given their structural features, which protect senior creditors against credit losses to some extent.

The Stable Outlook reflects AL’s resilient performance through the pandemic-driven severe downturn and the aftermath from the Russian-Ukraine conflict. AL demonstrated robust access to capital markets at attractive rates, effective management of lessee deferrals and defaults, and successful aircraft remarketing efforts, while maintaining moderate leverage and adequate liquidity and profitability. Besides AL’s reported loss in FY22 driven by the extraordinary write-off on aircraft in Russia, AL has been profitable and has had no aircraft impairment since inception. The Stable Outlook also takes into considerations the favorable near-term industry dynamics with strong aircraft demand as a result of strong passenger travel demand but limited aircraft supply.

Rating Sensitivities

A ratings upgrade in the near future is not expected given the industry’s potential challenges, susceptibility to event risk in general and the company’s reliance on wholesale funding, despite the Company’s resilience demonstrated during the pandemic. The Stable Outlook could be revised to Negative or the ratings could be downgraded or reviewed for downgrade if air traffic declines and leads to increased delinquencies, defaults and/or impairments, or a decline in funding availability with significant negative impacts on profitability, capital and/or liquidity metrics. A notable increase in the company’s asset encumbrance could also trigger a review.

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Related Publication

• 2024 Global Aviation Sector Outlook: Perseverance Paves the Way for a Brighter Year

Methodologies

• Financial Institutions: Finance Company Global Rating Methodology
• Corporates & Financial Institutions: Corporate Instrument Notching Global Methodology
• ESG Global Rating Methodology

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

Doc ID: 1003668

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Analytical Contacts

Michael Dodge, Senior Director (Lead Analyst)

+353 1 588 1190

michael.dodge@kbra.com

Jiaoren Wang, Associate Director

+1 646-731-1297

jiaoren.wang@kbra.com

Danise Chui, Managing Director (Rating Committee Chair)

+1 646-731-2406

danise.chui@kbra.com

Business Development Contact

Arielle Smelkinson, Senior Director

+1 646-731-2369

arielle.smelkinson@kbra.com

Source: Kroll Bond Rating Agency, LLC

FAQ

What are the ratings affirmed by KBRA for Air Lease ?

KBRA affirms A- issuer and senior unsecured debt ratings as well as the BBB rating for the preferred shares for Air Lease

What rating does KBRA assign to the Medium-Term Notes of Air Lease ?

KBRA assigns a senior unsecured rating of A- to €600.0 million 3.70% Medium-Term Notes, Series A, due April 15, 2030.

What are the key credit considerations for Air Lease 's ratings?

The ratings are driven by AL's global franchise, leading market position, strong financial fundamentals, young fleet, diverse customer base, and access to capital markets.

What factors support the Stable Outlook for Air Lease ?

AL's Stable Outlook is supported by its resilient performance during the pandemic, effective management of lessee deferrals and defaults, and favorable industry dynamics with strong aircraft demand.

What could trigger a review of the ratings for Air Lease ?

The ratings could be downgraded or reviewed for downgrade if air traffic declines, leading to increased delinquencies, defaults, impairments, decline in funding availability, or notable increase in asset encumbrance.