Kroll Bond Rating Agency assigned a debt rating of BBB with a negative outlook to the non-cumulative perpetual Series B preferred stock to be issued by Air Lease, an aircraft leasing company headquartered in Los Angeles. KBRA most recently affirmed Air Lease’s issuer rating and senior unsecured debt rating of A- and Series A preferred shares rating of BBB and revised the ratings outlook from stable to negative on March 27, 2020.

Key Credit Considerations

The proposed preferred shares qualify to receive 75% equity credit for the purposes of KBRA’s leverage calculation. The preferred shares rating is two notches below Air Lease’s issuer 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. If dividends on the preferred shares are in arrears, dividends on any parity securities as well as other more subordinated securities may not be paid. The 75% equity credit indicates that the preferred securities are highly loss absorbing given their structural features, which will protect senior creditors for credit losses to some extent.

KBRA noted that Air Lease is a highly rated entity with a highly unencumbered asset base consisting of highly liquid aircraft assets as well as relatively low leverage (debt/equity of 2.7x and net debt/equity of 2.4x as of Dec. 31, 2020). KBRA further said that if the credit profile of Air Lease deteriorates and results in a lower rating, the notching differential between the issuer rating and preferred shares rating may potentially widen, reflecting a relatively higher risk of loss on the preferred shares. In addition, should Air Lease issue other forms of subordinated debt or hybrid securities, KBRA will review the notching and equity credit given. Finally, KBRA considers the quality of equity when assigning ratings and limits the amount of equity credit given to hybrid securities based on the total level of capital, including common stocks of the company.

Air Lease intends to use the proceeds of the issuance for general corporate purposes, which may include the purchase of aircraft or the repayment of existing indebtedness. Dividends will accrue at a fixed rate for the first five years and then reset based on the five-year Treasury Rate plus initial margin thereafter. Dividends are discretionary and non-cumulative. The preferred stock will rank senior to Air Lease’s common stock and junior to all of Air Lease’s existing and future debt obligations. If dividends of the preferred shares are in arrears, dividends on any parity securities and subordinated securities may not be paid.

The issuer and senior unsecured ratings of Air Lease are driven by the company’s management team, customer base (a significant portion of which either have government ownerships or are flag carriers), and financial fundamentals, as reflected by a low leverage strategy, profitability, liquidity and cash flow metrics, and a largely unencumbered asset base. In addition, Air Lease’s fleet is less prone to impairment risks. In KBRA’s view, Air Lease’s liquidity of $7.7 billion as of Dec. 31, 2020, including an undrawn, committed revolving credit facility of $6 billion and more than $1.7 billion in unrestricted cash, is sufficient to withstand a significant reduction in rental revenue as a result of rent abatements, delinquencies, or airline bankruptcies and to meet debt obligations as well as purchase obligations in the next 12 months. Additionally, subsequent to Dec. 31, 2020, Air Lease issued $750 million of senior unsecured medium-term notes due in 2024. Furthermore, Air Lease’s unencumbered asset base can provide additional liquidity in times of stress.

The negative outlook reflects the widespread severe impact of the COVID-19 pandemic on global passenger air traffic, which directly affects airlines as lessors’ customers with potential deterioration in lessors’ credit metrics due to rental abatements and the prospects of increased airline defaults, potential impairments and reduced financing availability.

Rating Sensitivities

A ratings upgrade in the near future is not expected. The negative outlook could be revised to stable if declines in coronavirus cases combined with the lifting of travel restrictions in the near term leads to significant recovery in global passenger traffic toward pre-pandemic levels. The negative outlook could be revised to watch downgrade or the ratings could be downgraded if air traffic remains significantly depressed beyond 2021 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 Air Lease’s asset encumbrance also could trigger a review for downgrade.