Aircastle reports significant liquidity, conservative balance sheet, eyes investment-grade status

By Paul Deckelman

New York, Feb. 14 – Aircastle Ltd. has what its acting chief executive officer calls “significant liquidity” and a “conservative balance sheet” that he says gives the Stamford, Conn.-based commercial aircraft leasing company an edge over its sector peers.

“Our conservative capital structure remains a key competitive advantage,” Michael J. Inglese declared on Aircastle’s Tuesday conference call following its release of results for the 2016 fourth quarter and fiscal year ended Dec. 31.

“It provides us with significant investment flexibility and gives us the ability to move quickly, to seize on profitable opportunities across the market. During 2016, we took advantage of low interest rates and strong financial markets to raise a total of almost $1.3 billion in new financing. We had $5.1 billion of unencumbered assets at year-end, which included $456 million of unrestricted cash.”

Active in the capital markets

The financing included a $500 million sale of new 5% senior notes due 2023. That junk-bond deal priced at par last March 21 after the quick-to-market issue was upsized from an originally announced $400 million. Proceeds were slated for general corporate purposes, which the company said could include aircraft acquisition or debt refinancing.

Besides the bond deal, the company was active in the bank loan market. In late March, it upsized its revolving credit agreement commitment to $675 million from $600 million and extended its maturity by one year to May 2020.

In early April, it announced that it had entered into a $120 million unsecured loan in the Japanese bank market, followed in June by $434 million of bank loan financing from what it called “traditional European sources.” Later in the year, it lined up a $135 million unsecured revolver in the Asian market.

Inglese – the company’s chief financial officer, elevated to acting CEO while CEO Ron Wainshal is on medical leave – said that as of year-end, the company had $456 million of unrestricted cash and $810 million of unused revolver capacity.

Its total borrowings were approximately $4.5 billion, including $3.3 billion of unsecured debt, most of that in the form of seven outstanding bond issues. The weighted average coupon on its debt at year-end was 5.01%, and the weighted average maturity of Aircastle’s debt portfolio was approximately 3.7 years.

The company’s ratio of net-debt-to-equity remained at 2.2 times, and unsecured debt represents approximately 73% of its total debt.

Interest expense for the quarter was $67 million, an increase of 13%, or $7.6 million, over the prior year, due to higher average debt balances during the fourth quarter of 2016, along with $3.5 million of loan termination fees associated with one aircraft sold during the quarter.

Inglese said that its “very strong liquidity position” was helped by almost $470 million of cash flow from the operating business, as well as its $1.3 billion of incremental financing raised in the capital markets, and more than $750 million of proceeds from aircraft sales.

“We also took advantage of continued investor demand for aircraft and profitably sold a number of older, less-attractive aircraft,” he said. The company sold 30 aircraft last year for over $750 million in proceeds, with a gain on sale of $39 million. During the fourth quarter alone, it sold 11 aircraft for nearly $270 million and $24 million in gains. Inglese said that the 2016 sales included seven wide-body passenger jetliners and three big jets used as freighters.

“This has increased our liquidity and earnings, while overall upgrading the quality of our portfolio.”

While it was selling off aircraft it no longer wanted, Aircastle was busy acquiring new jet aircraft for its fleet, which it then turned around and leased to major airlines, air freight companies and other operators.

He noted the growth of its fleet – at year-end, Aircastle’s owned and managed fleet of 206 aircraft was up from 167 at the end of 2015, while over the past five years, the net book value of its owned and managed fleet has grown at a compound rate of almost 10% per year, and is now approaching $7.2 billion.

Looking for investment grade

Inglese told the analysts on the call that “we believe this growth is consistent with our strategic goal of reaching investment grade. An investment grade rating would significantly expand our borrower base and further reduce our funding costs.” The company’s unsecured bonds are currently rated Ba1 by Moody’s Investors Service and BB+ by Standard & Poor’s.

During the question and answer portion of the call, Inglese told an analyst asking about the company’s efforts to get to investment grade that “we think we are on a reasonable track – we think we can continue to deliver strong credit metrics.”

He said that he was encouraged because in the last six to 12 months, Moody’s “has taken a more constructive view of the industry overall.” He also noted that S&P and Fitch Ratings had upgraded Aircastle sector peer AerCap Holdings NV “in the course of what they’ve done over time, [and] Moody’s has put them on a positive outlook.”

He said that about a year ago, “we got a one-notch upgrade from Moody’s from Ba2 to Ba1. So we continue to do what we think makes sense for the business overall with a view on that topic and in the normal course of our conversations with the agencies. We’ll be visiting with them over the course of the next month or so and continuing to make our case – and we’ll obviously keep everybody updated on our progress.”

© 2015 Prospect News.
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