Fitch Ratings has affirmed Dubai Aerospace Enterprise (DAE) Ltd's (DAE) Long-Term Issuer Default Rating (IDR) at 'BBB-'. At the same time, Fitch has affirmed DAE Funding LLC's senior unsecured debt rating and DAE Sukuk (DIFC) Limited's (DAE Sukuk) sukuk programme and debt ratings at 'BBB-' and DAE's senior secured debt rating at 'BBB'. The Rating Outlook on DAE's Long-Term IDR has been revised to Stable from Negative..
These actions are being taken in conjunction with a global aircraft leasing sector review conducted today by Fitch, covering seven publicly rated firms. For more information on the sector review including a description of Fitch's base and downside case forecasts, please see 'Fitch Takes Various Actions on Aircraft Lessors Following Peer Review', available at 'www.fitchratings.com'.
DAE is fully-owned (directly and indirectly) by the Investment Corporation of Dubai, the investment arm of the Government of Dubai. At end-1Q21, DAE's owned, managed and committed fleet of 377 aircraft with the owned fleet (303 aircraft) valued at around USD11.7 billion. DAE Funding LLC is the U.S.-based unsecured debt issuing subsidiary of DAE with all outstanding debt guaranteed by DAE.
KEY RATING DRIVERS
LONG-TERM IDR
The revision of DAE's Rating Outlook to Stable from Negative reflects Fitch's belief that despite an expectation for an uneven and slow recovery for the global commercial aviation industry following the unprecedented downturn in 2020, the company will maintain sufficient headroom relative to Fitch's downgrade triggers for liquidity coverage and gross debt to tangible equity leverage over the Rating Outlook horizon.
The ratings affirmation reflects DAE's adequate financial performance in 2020 and 1Q21, including the absence of fleet impairments, sound funding profile, good liquidity position and adequate leverage. DAE's ratings also reflect the firm's scale as one of the largest aircraft lessors globally, diverse fleet profile and adequate lessee diversification.
Rating constraints specific to DAE include an improving but still above peer average weighted average fleet age, some exposure to typically less liquid asset classes such as turbo prop and freighter aircraft and Fitch's view that DAE's governance is modestly weaker than peers.
Fitch's sensitivity analysis for DAE incorporated forecasted quantitative credit metrics for the company under the agency's base case and downside case assumptions, which include up to 30% cumulative lease deferrals for an 18-month period; the default of up to 20% of lessees; and up to 35% impairment of the net book value of default the fleet. Fitch believes DAE will (pro forma for debt repayments in 2H21) have sufficient liquidity and capitalization headroom to withstand near-term reductions lease of cash flows in both scenarios without breaching Fitch's downgrade liquidity coverage and leverage threshold of 1.0x, and 3.0x, respectively.
DAE's exposure to restructured or insolvent airlines amounted to USD0.7 billion (16 aircraft) across 11 airlines at end-March 2021. Positively, over half of aircraft involved have been re-contracted, either with the existing airline or other lessees. Re-lease risk in 2H21 and 2022 is contained with 15 owned aircraft requiring redeployment between June 2021 and end-2022. DAE's largest exposure (by externally appraised half-life current market value) at end-1Q21 was to Emirates (14%, a related party) followed by American Airlines (8%) and Gulf Air (8%).
At end-1Q21, the total value of lease deferrals amounted to USD195.5 million or 16.4% of TTM lease revenue. Near-term relief granted to lessees at end-1Q21 amounted to USD139 million or 11.6% of TTM lease revenue and were comfortably covered by the economic value inherent in lease extensions obtained in exchange for near-term relief. DAE expects to recover the bulk of relief granted in 2H21 and 2022. Portfolio lease utilisation remained close to 99% at end-1Q21. The weighted average age of DAE's portfolio was six years at end-1Q21, marginally improved year-on-year and moderately higher than at most other similarly-rated aircraft lessors.
DAE's gross debt/tangible equity ratio at end-1Q21 was close to the leverage downgrade trigger identified by Fitch (3.0x) and will likely temporarily exceed it at end-1H21. However, Fitch expects the ratio to decline in 2H21 as DAE early redeems legacy debt which will create capitalization headroom to withstand moderate impairments in the base case forecast.
Since 2018, DAE has materially improved its funding profile by increasing unsecured funding (as a proportion of total funding), to 66% at end-1Q21 from below 40% at end-2018. In late 2020, DAE placed its inaugural sukuk issue which provides further funding diversification. Management has indicated that it is committed to maintaining this ratio at the higher end of its 50% to 70% target range in the long term.
DAE's liquidity position compares well with peers and available liquidity stood at USD3.3 billion at end-1Q21 which together with projected cash flow from operations comfortably covered debt maturities, amortisation, and capital commitments over the next 12 months ending end-1Q22. Debt maturities are well laddered (USD500 million senior unsecured bond due in November 2021, no material maturities in 2022 and 2023). Fitch expects the Fitch-calculated liquidity coverage ratio, which was around 3.6x at end-1Q21, to continue to compare well with peers.
SENIOR SECURED, SENIOR UNSECURED AND SUKUK DEBT
DAE's senior secured notes are rated one notch above DAE's Long-Term IDR, reflecting the aircraft collateral backing these obligations, which suggests above average recovery prospects in a stress scenario.
The equalisation of the unsecured debt rating with DAE's Long-Term IDR reflects sufficient unsecured debt, as well as an available pool of unencumbered assets (USD6.9 billion at end-1Q21), which suggest average recovery prospects for unsecured debtholders in a stress scenario.
DAE Sukuk's programme and issue ratings are driven solely by DAE's Long-Term IDR. This reflects Fitch's view that default of these obligations would reflect the default of DAE (see 'Fitch Assigns Final 'BBB-' Ratings to Dubai Aerospace's Sukuk Programme and First Issue' published on 23 November 2020 and available on www.fitchratings.com for further detail).
RATING SENSITIVITIES
LONG-TERM IDR
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--Upside rating potential is limited in the short-term;
--Beyond that, if the health crisis eases and is met with a general resumption of
air travel and broader economic activity returning towards pre-coronavirus levels, then improved franchise and scale could in conjunction with recovering profitability, continued sound liquidity and improved leverage support a positive rating action.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--A scenario where there are additional travel restrictions and countrywide lockdowns and slower than anticipated vaccine rollout, followed by slower than expected recovery of pandemic-driven declines in air traffic, higher airline insolvencies, reduced propensity for government support, and continued capital markets volatility, thus limiting financing availability well into 2022. The magnitude of any rating actions under such a scenario would be influenced by the extent to which DAE's liquidity coverage ratio is expected to fall below 1.0x or its leverage is expected to approach or sustainably exceed 3.0x.
SENIOR SECURED, SENIOR UNSECURED AND SUKUK DEBT
The ratings on the secured debt and unsecured debt are primarily sensitive to changes in DAE's Long-Term IDR and secondarily to the relative recovery prospects on the instruments.
The rating of the trust certificate issuance programme and certificates issued under the programme are principally sensitive to changes in DAE's Long-Term IDR. The ratings could also be sensitive to changes to the roles and obligations of DAE under the sukuk's structure and documents.
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
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