Avation PLC #B+# Rating Affirmed With Stable Outlook

Stocks and Financial Services Press Releases Tuesday September 19, 2017 15:56
SINGAPORE--19 Sep--S&P Global Ratings

SINGAPORE (S&P Global Ratings) Sept. 19, 2017--S&P Global Ratings todayaffirmed its 'B+' long-term corporate credit rating on the Singapore-basedairplane leasing company, Avation PLC. The outlook remains stable. Inaddition, we affirmed our 'B' long-term issue rating on the medium-term notes

program that Avation guarantees, and the US$120 million senior unsecured notesunder the program. The recovery rating on the notes remains '5'.

The affirmation reflects our view that Avation's earnings quality willcontinue to improve gradually as the company expands and further diversifiesits aircraft and customer exposure. Along with these improvements, the ratingcontinues to incorporate the company's small size relative to other leasing

companies, as well as high leverage to fund the fleet growth.

Avation has sold mid-life and older airplanes to buy newer ones. Through assetrotation in the fiscal year ended June 30, 2017, the company's fleetcharacteristics have improved. The fleet's weighted average age is down to 3.3years, from 4.2 years in the previous fiscal year, and its weighted averageremaining lease term is up to 7.5 years, from 6.8 years.

We believe Avation will also further diversify its customer base while itsfleet grows. New airplanes include at least three ATR 72 aircraft it willdeliver to Mandarin Airlines by December 2017. Virgin Australia Ltd., whichaccounted for two-thirds of Avation's revenue in 2015, stood for 38% in 2017.

Additionally, the three largest airlines' contribution to Avation earningsdeclined to 70% in the latest financial year from 85% in the prior year.

In addition, following the completion of the sale of six ATR 72 airplanes in2017, Avation has built cash reserves and improved leverage to support theacquisition of additional planes. The potential purchase of wide-body aircraftwould reduce the concentration to ATR 72 turboprops and narrow body jets.

However, this would represent a new asset class for the company, andreconfiguration in the event of a repossession can be expensive relative tonarrow-body aircraft, especially as unit prices are high relative to Avation'ssize.

We believe Avation's ability to manage wide-body aircraft remains untested,but the diversification is positive. We expect new wide-body aircraft wouldcost at least US$100 million, but that the rating could support a small numberof acquisitions with lease rates and financing comparable to the currentfleet.

The stable outlook reflects our expectation that Avation will maintain itsprofitability and leverage over the next 12-24 months, while expanding thefleet. We forecast that Avation's EBIT interest coverage will remain1.6x-1.9x, and the ratio of FFO to debt will stay at 6%-9% over the period.

We could lower the rating if Avation's EBIT interest coverage remainssustainably below 1.5x. Earnings pressure due to customer financial stress ora significant increase in debt because of aggressive capital expenditure forfleet expansion could cause such deterioration.

We would upgrade Avation if the company continues growing and diversifying itsoperations. We would also expect it to maintain a consistent financial policy,so that Avation's EBIT interest cover remains about 1.5x and FFO-to-debt ratioin the 6%-9% range.

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