Moody's Raises Outlook on Aircastle (AYR) to Positive

Moody's Investors Service upgraded Aircastle Limited's (NYSE: AYR) senior unsecured debt rating to Ba2 while affirming the company's Ba2 corporate family rating. Moody's also revised Aircastle's rating outlook to positive from stable.

RATINGS RATIONALE

The upgrade of Aircastle's senior unsecured debt rating reflects growth in the company's unencumbered aircraft, reduced reliance on secured indebtedness, and improved asset coverage of the company's senior unsecured obligations. Aircastle's unencumbered flight equipment increased to $2.9 billion at September 30, 2014, or 55% of total leased aircraft, up from $2.7 billion (52%) at year-end 2013 and $2.1 billion (44%) at the end of 2012. Similarly, senior unsecured debt grew to 60% of Aircastle's total debt at September 30, 2014 from 58% at year end 2013 and 49% at year end 2012, reflecting a reduction in the firm's use of secured funding. At September quarter end, unencumbered aircraft provided 1.3x coverage (undiscounted) of Aircastle's $2.2 billion of senior unsecured debt, up modestly from 1.25x and 1.20x at December 31, 2013 and 2012, respectively. In Moody's view, the gradual transition of Aircastle's funding toward a greater proportion of senior unsecured debt has also improved the company's financial and operational flexibility.

During 2014, Aircastle aggressively sold older aircraft in its fleet and invested in current-vintage, in-demand aircraft, resulting in improved fleet composition that also strengthens senior creditors' asset protection. Through September 30, 2014, Aircastle sold 36 aircraft with an average age of 17 years to unrelated parties and acquired seven newer wide-body and six mid-aged narrow-body aircraft that reduced the weighted average age of the company's fleet to 8.6 years from 9.9 years at year-end 2013 and 10.7 years at year-end 2012. Notwithstanding these improvements, Aircastle's fleet has higher risk characteristics compared to certain peers, including a higher average aircraft age and a higher percentage of wide-body aircraft and freighters. Moody's anticipates that Aircastle's aircraft investment and portfolio management strategies will further improve fleet composition, resulting in lower impairment risk and less volatile earnings. Meanwhile, Aircastle has generated relatively stable cash flows and maintained a strong liquidity position compared to its manageable debt maturity profile over the next two years.

The change in Aircastle's rating outlook to positive is based on the company's improved aircraft portfolio composition, more flexible funding structure, and Moody's expectation that the company will produce less volatile earnings while maintaining moderate leverage.

Aircastle's ratings also reflect the company's competitive mid-tier position within the aircraft leasing sector, its record of profitable operations, and its history investing in and managing mid-life commercial aircraft. The ratings also consider Aircastle's adherence to a moderate leverage strategy, with debt/equity measuring 2.2x at September 20, 2014.

Ratings could improve if Aircastle achieves sustainably higher return on managed assets and further improves the risk profile of its fleet while maintaining acceptable leverage and liquidity levels.

Rating could be downgraded if Aircrastle's profitability unexpectedly declines, leverage materially above 2.5x or the company's liquidity runway weakens.

The following ratings were affected by today's action:

Corporate Family Rating: affirmed at Ba2

Senior unsecured rating: to Ba2 from Ba3

Senior unsecured shelf: to (P)Ba2 from (P)Ba3

Subordinate shelf: to (P)Ba3 from (P)B1

Preferred shelf -- non-cumulative: to (P)B2 from (P)B3

Preference shelf: to (P)B1 from (P)B2

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