S&P Places AerCap (AER) on CreditWatch Negative Amid ILFC Acquisition
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Standard & Poor's Ratings Services today placed its ratings on AerCap Holdings N.V. (NYSE: AER), including the 'BBB-' corporate credit rating, on CreditWatch with negative implications.
The merger of AerCap and International Lease Finance Corp. (ILFC) should strengthen the combined company's competitive position somewhat and provide opportunities for overhead cost savings. With a fleet of more than 900 aircraft, ILFC is currently the second-largest aircraft lessor, behind General Electric Capital Aviation Services, while AerCap, with a fleet of 231 aircraft, is solidly within the second tier of aircraft lessors. In addition, the combined entity will have an order book of around 400 new aircraft, comprising a large number of in-demand new technology Airbus A350s and A320 neos, and Boeing 787s.
Under the agreement, ILFC would become a wholly owned subsidiary of AerCap and AerCap would assume ILFC's outstanding debt. With the incremental debt to fund the acquisition, as well as anticipated purchase accounting write-downs on ILFC's assets, we expect the combined entity's debt to capital will increase to more than 80% from the current low-70% area for each company. This would place it among the highest of the eight aircraft lessors rated by Standard & Poor's. Pro forma funds from operations to debt (currently about 10% for AerCap) would decrease modestly, reflecting the added debt and interest expense. "We expect that the consolidated AerCap would generate solid cash flow and gradually de-lever following the merger, but would not restore its balance sheet for at least several years," said credit analyst Betsy Snyder. As a result, we expect to lower AerCap's corporate credit rating to 'BB+' from 'BBB-' once the transaction closes.
The transaction, which the companies expect will close in the second quarter of 2014, is subject to AerCap shareholders' approval and regulatory approvals. Once AerCap's acquisition of ILFC is complete, American International Group Inc.--ILFC's parent--would own approximately 46% of AerCap, and its shares would be subject to a lock-up period, which will expire in stages over a nine- to 15-month period after the acquisition closes.
We will assess the combined entity's business and financial risk profiles to resolve the CreditWatch placement. Our preliminary conclusion is that we would lower AerCap's corporate credit rating one notch to 'BB+' from 'BBB-'.
The merger of AerCap and International Lease Finance Corp. (ILFC) should strengthen the combined company's competitive position somewhat and provide opportunities for overhead cost savings. With a fleet of more than 900 aircraft, ILFC is currently the second-largest aircraft lessor, behind General Electric Capital Aviation Services, while AerCap, with a fleet of 231 aircraft, is solidly within the second tier of aircraft lessors. In addition, the combined entity will have an order book of around 400 new aircraft, comprising a large number of in-demand new technology Airbus A350s and A320 neos, and Boeing 787s.
Under the agreement, ILFC would become a wholly owned subsidiary of AerCap and AerCap would assume ILFC's outstanding debt. With the incremental debt to fund the acquisition, as well as anticipated purchase accounting write-downs on ILFC's assets, we expect the combined entity's debt to capital will increase to more than 80% from the current low-70% area for each company. This would place it among the highest of the eight aircraft lessors rated by Standard & Poor's. Pro forma funds from operations to debt (currently about 10% for AerCap) would decrease modestly, reflecting the added debt and interest expense. "We expect that the consolidated AerCap would generate solid cash flow and gradually de-lever following the merger, but would not restore its balance sheet for at least several years," said credit analyst Betsy Snyder. As a result, we expect to lower AerCap's corporate credit rating to 'BB+' from 'BBB-' once the transaction closes.
The transaction, which the companies expect will close in the second quarter of 2014, is subject to AerCap shareholders' approval and regulatory approvals. Once AerCap's acquisition of ILFC is complete, American International Group Inc.--ILFC's parent--would own approximately 46% of AerCap, and its shares would be subject to a lock-up period, which will expire in stages over a nine- to 15-month period after the acquisition closes.
We will assess the combined entity's business and financial risk profiles to resolve the CreditWatch placement. Our preliminary conclusion is that we would lower AerCap's corporate credit rating one notch to 'BB+' from 'BBB-'.
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