Fitch Ratings has upgraded AerCap Holdings N.V.'s (AerCap) Long-Term Issuer Default Rating (IDR) and its rated subsidiaries to 'BBB' from 'BBB-'.

The Rating Outlook is Stable.

Fitch has also upgraded the senior secured ratings assigned to Delos Finance SARL to 'BBB' from 'BBB-', the senior secured ratings from various debt-issuing, wholly owned subsidiaries of AerCap to 'BBB+' from 'BBB', the senior unsecured debt ratings to 'BBB' from 'BBB-', the junior subordinated notes to 'BB+' from 'BB' and the preferred stock ratings to 'BB' from 'BB-'.

Key Rating Drivers

The upgrade reflects AerCap's ability to reduce and maintain leverage, as calculated by Fitch, below 2.7x, in combination with the maintenance of a robust funding and liquidity profile, with revolver availability of over $9 billion at Dec. 31, 2022 and liquidity coverage of 1.4x. The ratings also continue to reflect AerCap's scale and franchise strength as the world's largest aircraft lessor; transition of the portfolio to its target of 75% new technology aircraft; access to multiple sources of capital; a predominately unsecured funding profile with an unencumbered asset base in excess of $54 billion as of 4Q22; relatively consistent operating cash flow generation; and a strong and experience management team.

Rating constraints include funding and placement risks associated with the company's orderbook and modestly higher exposure to less liquid tier 2 aircraft relative to peers given the company's 'barbell' portfolio construction strategy. Rating constraints applicable to the aircraft leasing industry more broadly include the monoline nature of the business; vulnerability to exogenous shocks; sensitivity to higher oil prices, inflation and unemployment, which negatively impact travel demand; potential exposure to residual value risk; and reliance on wholesale funding sources.

As of Dec. 31, 2022, AerCap had an owned, managed, and committed portfolio of 3,532 aircraft, engines, and helicopters, with a net book value (NBV) of $59 billion, making the company the largest aircraft lessor globally. The company had good customer diversification, servicing approximately 300 customers in 80 countries, with no single customer representing more than 4% of the portfolio by market value, as estimated by Fitch. As of the same date, the two largest geographic exposures were to China and the U.S., representing 17% and 15%, respectively, of the portfolio by book value, as estimated by Fitch, which is consistent with peers.

In 2022, AerCap recorded a $2.7 billion pre-tax charge (5% of NBV), which represented a full write-down of its portfolio that remained in Russia. Fitch views this as a one-time event, and does not anticipate any material impairments going forward. Fitch considers AerCap's portfolio to be relatively liquid, comprised of tier 1 (74.6%) and tier 2 (12.5%), with an average of 7.2 years. An increasing proportion of AerCap's portfolio by market value consist of new technology aircraft, as new orders are delivered and older planes are sold or parted out. Management continues to make progress toward its articulated target to transform its fleet to 75% new technology aircraft (currently 66%) by 2024, which is viewed positively. Fitch believes this portfolio transition will support demand for AerCap's fleet and improve its asset quality. AerCap's widebody exposure is comprised of in-demand B787 and A350 aircraft, representing approximately 80% of the widebody fleet, which also reduces the risk of impairments in the current environment.

AerCap's core operating performance has improved in line with a recovery in global aviation, supported by post-pandemic pent-up travel demand. Absent the non-cash impairment charge taken on its fleet leased to Russian airlines, AerCap would have reported pre-tax income of $1.6 billion in 2022 compared to $1.1 billion a year ago. This translated to pre-tax ROAA of 2.2%, above the average of 1.7% from 2019-2022. Net spread, which is lease yields, less funding costs, was 8.8%, up from 8.0% a year ago and above the four-year average of 7.8%. Fitch expects AerCap's operating performance to remain stable over time.

Fitch's calculated leverage (gross debt to tangible equity), which treats AerCap's subordinated debt as 50% equity and junior subordinated debt as 100% equity, amounted to 2.5x as of Dec. 31, 2022. The stability of operating cash flow generation aided the company's deleveraging plan and AerCap achieved its net debt leverage target of 2.7x or below ahead of plan, despite the Russia-related impairment charge. In March 2023, the company announced a new $500 million share repurchase program authorizing repurchases of AerCap's shares through Sept. 30, 2023. Fitch expects AerCap will generate solid operating cash flows to maintain sufficient headroom relative to the leverage target for share repurchases. Fitch expects leverage to remain stable from here.

Unencumbered asset coverage of unsecured debt continues to improve, given a reduction in secured debt. Secured debt as a percentage of total assets was 14% and unsecured debt to total debt was 78% as of Dec. 31, 2022. Management has a secured debt to total assets target of not more than 20%, which Fitch believes supports funding flexibility and the maintenance of a robust pool of unencumbered assets.

At Dec. 31, 2022, AerCap had $18 billion of liquidity comprised of cash on hand, committed borrowing capacity, and expected operating cash flow over the next 12 months. These sources of liquidity covered next 12 months of expected capex and debt maturities of $13 billion by 1.4x. Over the medium term, as manufacturer production delays abate, Fitch expects liquidity coverage ratios for AerCap will decline modestly but be maintained with sufficient cushion above their 1.2x target.

The Stable Outlook reflects Fitch's belief that AerCap will maintain sufficient headroom relative to Fitch's downgrade triggers for liquidity coverage and debt to tangible equity leverage over the Outlook horizon, despite Fitch's expectations for increased macro challenges, including elevated market volatility, rising interest rates, growing inflation, and lingering pandemic variants, that lead to a downturn in economic conditions.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Macroeconomic and/or geopolitical-driven pressure on airlines, that lead to additional lease restructurings, rejections, lessee defaults, and impairments, which negatively impact the company's cash flow generation, profitability, and liquidity position could lead to negative rating actions. Negative rating pressure could also arise from a material increase in secured debt levels, leverage approaching or above 3.0x, resulting from capital returns, impairments or a higher risk appetite; liquidity coverage approaching or falling below 1.0x; or an inability to maintain a fleet profile comprised of highly liquid tier 1 aircraft and/or continued progress on transitioning its portfolio toward its new technology aircraft target of 75%.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Very strong and differentiated risk management and asset quality performance, while maintaining leverage below 2.5x, unsecured debt to total debt above 90%, a robust funding profile from revolver availability and liquidity coverage well in excess of 1.0x could yield positive rating actions. A material reduction in the size of the orderbook relative to the owned fleet, proactive management of near-term debt maturities, and a material increase of highly liquid tier 1 aircraft could also drive positive rating momentum.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

The secured note ratings are one notch above AerCap's Long-Term IDR and reflect the aircraft collateral backing these obligations, which suggest good recovery prospects.

The senior secured term loan ratings for Delos Finance SARL, which is a wholly owned subsidiary of International Lease Finance Corporation (ILFC), is equalized with the ILFC's IDR. The secured term loans are secured via a pledge of stock of the subsidiaries and related affiliates and are guaranteed by ILFC on a senior unsecured basis. The ratings on these secured term loans are not notched above ILFC's Long-Term IDR due to the lack of a perfected first priority claim on aircraft provided to support repayment of the term loans.

The equalization of the unsecured debt ratings with AerCap and ILFC's IDRs reflects material unsecured debt as a portion of total debt, as well as the availability of sufficient unencumbered assets, which provide support to unsecured creditors and suggest average recovery prospects in a stressed scenario.

The two-notch differential between the Long-Term IDR and the junior subordinated notes reflects poor recovery prospects in a stressed scenario, due to the subordinated nature of the instruments and the cumulative nature of the coupon in the event of a deferral, which implies a higher probability of loss absorption.

The ILFC preferred stock ratings are three notches below the Long-Term IDR and reflect the deep subordination and going-concern loss absorption nature of the instruments. The guarantee under the ILFC preferred stock only guarantees payment of principal and interest when due in accordance with the terms. Current and deferred interest under the ILFC preferred stock would not be expected to be paid until more senior debt holders are paid in full.

In addition, the going concern loss absorption triggers are viewed by Fitch to be further subordinated to AerCap's junior subordinated notes as reflected by the one notch differential between the two instruments.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

The senior secured debt, senior unsecured debt and hybrid debt ratings are primarily sensitive to changes in AerCap's and ILFC's IDRs, and secondarily, to the relative recovery prospects of the instruments.

SUBSIDIARY AND AFFILIATE RATINGS: KEY RATING DRIVERS

AerCap Ireland Capital Designated Activity Company, AerCap Global Aviation Trust and ILFC are wholly owned subsidiaries of AerCap, and their IDRs are equalized with the Long-Term IDR of AerCap.

SUBSIDIARY AND AFFILIATE RATINGS: RATING SENSITIVITIES

AerCap Ireland Capital Designated Activity Company's, AerCap Global Aviation Trust and ILFC's ratings are primarily sensitive to changes in AerCap's Long-Term IDR and are expected to move in tandem.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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