Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) and senior unsecured debt ratings of Air Lease Corporation (Air Lease) at 'BBB'.
Fitch has also affirmed Air Lease's preferred shares rating at 'BB+'. The Rating Outlook is at Stable.
These rating actions are being taken in conjunction with a global aircraft leasing sector review conducted today by Fitch, covering nine publicly rated firms. For more information on the sector review, please see 'Fitch Completes Aircraft Lessor Peer Review; Stable Credit Profiles Despite Looming Macro Risks', available at www.fitchratings.com.
Key Rating Drivers
The ratings affirmation reflects Air Lease's favorable portfolio relative to peers, comprised largely of young and liquid, Tier 1 aircraft, solid asset quality performance historically, and a peer-superior funding profile with 99% of its funding unsecured and approximately $25.6 billion of aircraft being unencumbered at March 31, 2022. Air Lease's ratings also remain supported by its scale and franchise as a leading lessor, low leverage, and an experienced senior management team.
Rating constraints applicable to Air Lease include funding and placement risks associated with the company's order book; and elevated key person risk. 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 March 31, 2022, Air Lease was one of the largest aircraft lessors in the world with a net book value (NBV) of $22.3 billion and an order book of 451 aircraft. The company has good customer diversification, serving 114 airline customers in 60 countries, with no single customer representing more than 6% of the total portfolio by market value, as estimated by Fitch. Air Lease's widebody exposure is above peer average, but mitigated by the portfolio's high quality, as the majority of customers are flag carriers and 67% of the widebody aircraft are comprised of new technology, by value, as estimated by Fitch.
Historically, Air Lease has had solid asset quality performance, having taken no impairments on its aircraft since inception through YE 2021. However, in 1Q22, the company recorded an $802.4 million impairment charge (3.5% of NBV), which represented a full write-down of its owned and managed fleet that remained in Russia. Fitch views this as a one-time event, and does not anticipate any material impairments going forward, as Fitch considers the company's fleet to be among the highest quality in the industry.
Fitch believes the eventual receipt of insurance proceeds (timing and amount to be determined) will help to eventually offset at least a portion of the impairment charge. The average age of the owned portfolio was 4.5 years at March 31, 2022, which is consistent with Air Lease's strategic focus on owning young aircraft.
The large size of Air Lease's orderbook and the associated funding requirement are among the company's primary rating constraints. Air Lease's orderbook represented 122% of the owned fleet by count at 1Q22, but the company had long-term leases in place for approximately 97% of its committed aircraft deliveries through 2023, which Fitch views favorably.
Air Lease's leverage, measured as gross debt to tangible common equity (which affords 100% equity credit to the $850 million in preferred shares), was 2.8x as of March 31, 2022; above its stated target of 2.5x. Leverage was negatively impacted by the 1Q22 non-cash impairment charge, however, Fitch expects leverage will revert toward management's long-term target by YE 2022, as operating cash flow generation and proceeds from asset sales support retained earnings growth. Any potential proceeds arising from the receipt of insurance claims on related to Russia aircraft, could also support retained earnings in the future.
At March 31, 2022, Air Lease had $1.5 billion of cash on hand and contingent liquidity of $6.8 billion, available under its committed revolving credit facilities. Fitch anticipates the company will generate approximately $1.4 billion of operating cash flow in 2022. Air Lease's debt maturity profile is well laddered and the next maturity is in July 2022 when $600 million of senior unsecured notes comes due, which was repaid with available liquidity. The company's liquidity coverage ratio (defined as cash on hand, borrowing capacity on committed facilities and expected operating cash flows over the next 12 months to debt maturities and purchase commitments over the next 12 months) was 1.7x, at March 31, 2022, which Fitch views as adequate given the large order book compared to peers. Since March 31, 2022, the company increased its revolving credit facility by $200 million to $7 billion, which incrementally improves Air Lease's liquidity coverage metrics. Over the medium-term, as manufacturer production delays abate, Fitch expects liquidity coverage ratios for aircraft lessor peers to revert, but remain above 1.0x.
Fitch's sensitivity analysis for Air Lease incorporated forecasted quantitative credit metrics for the company under the agency's base case assumptions. These included up to 15% cumulative lease deferrals for a six-month period, the default of up to 9% of lessees and up to 30% impairment of the NBV of the fleet.
Fitch believes Air Lease will have sufficient liquidity headroom to withstand near-term reductions lease of cash flows in the base case scenario without breaching Fitch's downgrade liquidity coverage threshold of 1.0x, although Fitch anticipates Air Lease to temporarily breach the agency's 3.0x leverage threshold given impairments taken on the aircraft portfolio in 1Q22 but revert below 3.0x within the Outlook horizon.
The Stable Outlook reflects Fitch's belief that Air Lease 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 the Russia-Ukraine conflict, elevated market volatility, rising interest rates, growing inflation, and lingering pandemic variants, that could delay air traffic recovery leading into 2023.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Pandemic and/or stagflation-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 yield 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 manageable widebody exposure.
A key person event with respect to Executive Chairman of the Board, Steven Udvar-Hazy or CEO and President, John Plueger would not lead to an immediate downgrade, but would be evaluated in the context of the potential impacts on Air Lease's strategic direction, industry relationships and risk appetite.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Differentiated risk management and asset quality performance, while maintaining leverage around 2.5x, unsecured debt to total debt at-or-around current levels, 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 and proactive management of near-term debt maturities could also drive positive rating momentum.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The ratings on the senior unsecured debt are equalized with the Long-Term IDR of Air Lease reflecting average recovery prospects in a stressed scenario given the availability of unencumbered assets.
Air Lease's preferred shares rating (given 100% equity credit) is two notches below the company's Long-Term IDR. The rating reflects the deep subordination and heightened risk of non-performance relative to other obligations.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The ratings of the senior unsecured debt are primarily sensitive to changes in Air Lease's Long-Term IDR and secondarily to the level of unencumbered balance sheet assets in a stressed scenario, relative to outstanding debt. A decline in the level of unencumbered asset coverage, combined with a material increase in the use of secured debt, could result in the notching of the unsecured debt down from the Long-Term IDR.
The rating on the preferred shares is primarily sensitive to changes in Air Lease's Long-Term IDR and is expected to move in tandem. However, the preferred shares rating could be downgraded by an additional notch to reflect further structural subordination should the firm consider other hybrid issuances. Fitch has afforded Air Lease's preferred shares 100% equity credit given the noncumulative nature of the distributions, the fact that the preferred shares are perpetual and the lack of change of control provisions and events of default.
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.
AIR LEASE CORPORATION 
