S&P Cuts AerCap Holdings N.V. (AER) to 'BB+' Following Closure of ILFC Deal

Standard & Poor's Ratings Services lowered its corporate credit rating on Amsterdam-based AerCap Holdings N.V. (NYSE: AER) to 'BB+' from 'BBB-'. We removed the rating from CreditWatch, where we placed it with negative implications on Dec. 16, 2013. The outlook is stable.

At the same time, we affirmed our 'BB+' issue-level ratings on AerCap's unsecured notes, and assigned a '3' recovery rating to these notes, indicating our expectation for meaningful recovery (50%-70%) in the event of a default.

"We based our downgrade of aircraft lessor AerCap on significantly higher debt leverage, resulting from its May 14, 2014, acquisition of competitor ILFC," said Standard & Poor's credit analyst Betsy Snyder.

AerCap financed the acquisition, valued at approximately $7.6 billion, through $3 billion of cash (comprised primarily of the proceeds of AerCap's recent unsecured debt issuance of $2.6 billion) and stock issued to former ILFC owner American International Group Inc. (AIG).

Standard & Poor's characterizes AerCap's business risk profile as "satisfactory," its financial risk profile as "significant," and its liquidity as "adequate" under our criteria.

Our assessment of the combined company's "satisfactory" business risk is based on its position as one of the two largest aircraft lessors. "The acquisition of ILFC by AerCap should strengthen the resulting company's competitive position somewhat and provide opportunities for overhead cost savings," said Ms. Snyder.

Our assessment of the company's "significant" financial risk is based on increased debt leverage, resulting from the acquisition, and access to diversified funding sources. Under the merger agreement, ILFC will become a wholly-owned subsidiary of AerCap, and AerCap will assume ILFC's outstanding debt. AerCap's recent issuance of $2.6 billion of unsecured notes financed a portion of the acquisition. With the incremental debt to fund the acquisition, we expect the combined entity's debt-to-capital ratio to increase to over 80% from AerCap's 71% at Dec. 31, 2013. This will place it among the highest of the eight aircraft lessors that Standard & Poor's rates.

"We expect the consolidated entity to generate solid cash flow and gradually decrease leverage following the merger, but we don't expect AerCap's debt leverage to return to previous levels for at least the next 18 to 24 months," said Ms. Snyder.

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