Moody's Investors Service assigned a Ba2 corporate family rating to Dubai Aerospace Enterprise (DAE) Ltd and a Ba3 rating to the $1.9 billion senior unsecured notes due 2022 and 2024 issued by DAE Funding LLC. The outlook for the ratings is stable.
Moody's assigned a Ba2 corporate family rating to DAE on the basis of its increased franchise strength after its forthcoming acquisition of AWAS Aviation Capital D.A.C, balanced aircraft fleet risk characteristics, and moderate leverage compared to peers. DAE's rating is constrained by its liquidity profile, which is less robust than higher rated peers.
DAE's acquisition of AWAS will result in the combined operations having a top ten global market position in commercial aircraft finance, with a total owned fleet of 281 aircraft, 43 managed aircraft, and purchase commitments for 70 additional aircraft, a globally diverse customer base and a March 2017 pro forma fleet NBV of over $11 billion. AWAS' historic asset and risk management strengths together with DAE's unique access to capital and customers in the United Arab Emirates will aid the combined company in its efforts to further strengthen its business proposition within the competitive aircraft leasing sector.
DAE's combined fleet has balanced risk characteristics, highlighted by geographic and aircraft model diversification and a reasonable weighted average age and average remaining lease term. Versus peers, DAE's fleet consists of a relatively high percentage of freighter aircraft (17%), though most are on long-term lease to an Emirates Airlines affiliate, a positive risk offset. At outset, DAE's combined fleet will have an average fleet age of 5.8 years, lower than certain peers, and average remaining lease term of 5.8 years, which is comparable to peer median. The combined fleet is geographically diverse, though with a higher Middle East exposure than many peers. DAE's procurement strategy includes more aggressive growth through a broader variety of aircraft acquisitions than has been the case at AWAS.
Integration risks will likely be manageable. DAE has elected to utilize AWAS' well-regarded platform and as a result just 131 aircraft (DAE's) will undergo transition. After the transaction is consummated, AWAS will continue to operate as an encapsulated subsidiary of DAE.
Pro Forma combined leverage of 3.4x debt to tangible common equity is above Moody's rated peer median of 3.1x. DAE should be able to improve upon this leverage profile, based on the strength of the company's cash flows from long-term leases and modest commitments of capital toward new aircraft purchases.
DAE's funding structure and liquidity are the most notable constraints on its Ba2 rating. DAE's issuance of senior unsecured notes improves its funding diversification and broadens its access to market capital, but DAE will remain highly reliant on secured financing, with secured debt representing 77% of pro forma funding, limiting the company's financial flexibility. The combined company has total unsecured lines of $761 million with $360 million available to draw at March 2017 (pro forma), which together with cash results in 24-month liquidity coverage of less than 70%, well below higher rated peers.
In connection with the acquisition, DAE's shareholders, including the Investment Corporation of Dubai and other government related enterprises, will subscribe to $1.35 billion of shares in DAE. DAE is contemplating financing up to the entire amount via a note receivable from its shareholders, which Moody's believes increases DAE's risk profile. The note would mature six months prior to the maturity of the senior unsecured notes and any default under the senior unsecured notes would trigger an acceleration of the shareholder note receivable.
The Ba3 rating of the senior notes reflects their priority in DAE's capital hierarchy. The notes will be guaranteed by DAE but not by any of DAE's or AWAS' operating and asset holding subsidiaries. The notes will be structurally subordinated to the liabilities of these entities, which are comprised primarily of recourse and non-recourse secured debt. Proceeds from the notes will be held in escrow until DAE closes its acquisition of AWAS, which is expected to occur during the third quarter.
The ratings could be upgraded if DAE: 1) further diversifies its funding to significantly reduce reliance on secured debt and accumulate unencumbered aircraft, resulting in a ratio of secured debt to tangible assets of 35% or less; 2) increases alternate liquidity, resulting in a 24-month coverage ratio of more than 70%; 3) sustainably reduces its post-acquisition leverage, resulting in a ratio of debt to tangible net worth of between 2.5x and 3.0x; and 4) generates post-acquisition profitability that compares well with peers.
The ratings could be downgraded if DAE: 1) encounters integration challenges that negatively affect profitability prospects; 2) increases its reliance on secured debt; 3) weakens 24-month liquidity coverage to less than 50%; or 4) increases Debt/Tangible Net Worth leverage to greater than 4.0x.
The principal methodology used in these ratings was Finance Companies published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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