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Outperforming Aircastle bonds still have room to run

admin | October 30, 2020

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Investors comfortable playing in the riskier aircraft leasing credits in the front-end of the curve should consider Aircastle Ltd (AYR). AYR appears to have an adequate liquidity profile to meet near-term debt obligations, and the company was one of the top performing credits in the entire investment grade index throughout much of the latter part of the credit recovery over the summer months. Since the end of May, AYR has been a top 5 performing credit with a cumulative excess return of nearly 19%, and the single best performer on a spread basis, tightening by over 600 bp. The AYR 4.4% ‘23s tightened by over 700 bp during that time frame and still yield nearly 4.00%.

Recommendation: AYR 4.40% 9/25/23 @ +375 bp to 3-year; G+376 bp; 3.93%; $101.24
Similar issues: AYR 5½ 2/22 310-290 to the 2-year
Issuer: Aircastle Ltd (AYR)
CUSIP: 00928QAR2
Amount outstanding: $650 million
Rating: Baa3/BBB-/BBB
Global Issue

Exhibit 1: AYR vs IG Aircraft Lessor comps

Source: Bloomberg/TRACE Indications, Amherst Pierpont Securities

AYR is unique among peers in that they strictly acquire mid-life aircraft, as opposed to financing new or newer equipment. They are focused on older aircraft and a customer base of more “upstart” global airlines. Average age of their aircraft portfolio is about 9 years, which compares with an industry leading level of about 4 at Air Lease and low 6s at names like AER. The company has been modernizing its fleet in recent quarters, bringing the average age down from about 9.5 a year ago. While this still places AYR among the riskier names in the Aircraft Leasing peer group, the upside of this characteristic is that the company has absolutely no exposure to the Boeing 737 Max.
AYR has $7.2 billion in equipment held for lease with no existing order book. As of the most recent quarter, the fleet consists of 283 aircraft, the large majority of which are unencumbered. 90% of the aircraft are currently classified as narrowbody. AYR services 80 separate airline customers in 44 nations. Some of their larger lessees include IndiGo, Latam, Easy Jet, Air Canada & Iberia. The portfolio is well diversified geographically: 40% Asia/Pacific, 30% Europe, 25% in North and South America, and about 8-10% in the Middle East/Africa.
AYR’s credit profile improved in recent months with the acquisition by minority stakeholder Marubeni in a joint venture with Mizuho, which was announced late last year and closed at the end of 1Q20. Japanese conglomerate Marubeni (rated Baa2/BBB), with an enterprise value over $30 billion, raised its ownership in AYR to 75% with a $1.1 billion investment. The new foreign ownership provides considerable implicit financial support that wasn’t there previously. Fitch upgraded the rating to BBB from BBB- on completion of the acquisition. At the time the acquisition was announced, there was some indication that the new owners might seek to completely refinance AYR’s outstanding debt obligations with a large-scale recapitalization, but that doesn’t seem to be the case. Instead they appear be doing more traditional tender/retire and re-issue as the market permits. AYR last tapped the public debt markets in August of this year with a $650 million 5-year debt launch, a portion of which was earmarked to be utilized to refinance or redeem upcoming debt maturities.
Moody’s affirmed AYR’s senior Baa3 rating last month and assigned a stable outlook. The rating agency had placed most of the IG players in the industry on watch negative back in June of this year. Moody’s highlighted the company’s improved liquidity profile, which it believes makes the credit more resilient to a lengthy downturn in the global aviation sector. The rating agency also cited the Marubeni/Mizuho ownership described above. The affirmation of the rating helps alleviate near-term risk of a move to non-investment grade; AYR bonds do not include coupon step-up language.

Management reports that they have over $2 billion in available liquidity. AYR has $500 million in senior debt maturing in each 2021 and 2022, ahead of the $1.15 billion due in the bond’s maturity year of 2023. The Company has $319 million in cash on the balance sheet as of 2Q20, plus $1.08 billion in available capacity on its credit facilities through 2022. Cash flow from operations is typically over $500 million annually.

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