Fitch Ratings has revised Aircastle Limited's Rating Watch status to Positive from Evolving, following additional information becoming available to Fitch with respect to Aircastle's expected ownership composition and the credit risk profile of its expected ownership group. Fitch previously placed Aircastle's 'BBB-' Long-Term Issuer Default Rating (IDR) and debt ratings on Rating Watch Evolving on Nov. 6, 2019 following the announced acquisition of the company by Marubeni Corporation and Mizuho Leasing Company, Limited. Aircastle has indicated that it expects the transaction to close in mid-2020.
KEY RATING DRIVERS
The revision of the Rating Watch status to Positive from Evolving reflects Fitch's view that Aircastle's ratings are likely to be upgraded or stay at their current level, while a downgrade is believed to be unlikely. This reflects the joint ownership structure announced by Marubeni and Mizuho Leasing on Nov. 7, 2019, Fitch's view of the strategic alignment of Aircastle with its potential new ownership group and Fitch's assessment of the credit risk profile of Marubeni.
Marubeni and Mizuho Leasing will acquire 100% of the shares not currently owned. Marubeni plans to increase its existing 29% stake 50%, while a newly formed joint venture between Marubeni and Mizuho Leasing will acquire the remaining 50% of outstanding shares. On an aggregate basis, the equity funding of the proposed share purchases will consist of 65% and 35% contributions by Marubeni and Mizuho Leasing, respectively. As a result, Marubeni will own a total of 75% of shares (50% of shares directly and 25% indirectly through the joint venture with Mizuho Leasing), while Mizuho Leasing will indirectly own the remaining 25% of the shares.
Post-closing, Fitch expects to classify Aircastle as a "Strategically Important" subsidiary of Marubeni, as defined under the agency's 'Non-Bank Financial Institutions Rating Criteria,' dated Oct. 12, 2018. Under this designation, Fitch may notch down from the institutional support provider's IDR by one to two notches, or, if it will result in a higher rating, notch up by one from the standalone alone credit risk profile of the subsidiary. Fitch does not publicly rate Marubeni. However, Fitch believes Marubeni to be of a sufficiently high credit quality to merit a rating uplift for Aircastle consistent with Fitch's criteria should the transaction close.
Fitch's view of Aircastle's strategic importance reflects Marubeni's majority ownership of the company, at 75%, its long-term commitment to the aviation leasing business and Aircastle more specifically (having been an investor in and board member of Aircastle since 2013), and the alignment of Aircastle with the broader leasing activities undertaken by Marubeni and Mizuho Leasing. Fitch believes that Aircastle will bolster Marubeni's lease and finance businesses by increasing portfolio diversification, despite being small relative to the broader organization and operating in a different jurisdiction.
As a Japanese trading and investment business company, Marubeni is not a regulated entity, which suggests capital support could potentially flow to Aircastle without regulatory intervention. In addition, Fitch expects Marubeni will have adequate ability to support Aircastle's possible capital needs given the latter's small size (approximately 12%) relative to the assets of the combined entities and Marubeni's solid FCF and liquidity.
Marubeni and Mizuho Leasing have not yet publicly articulated their strategic or financial objectives with respect to Aircastle, including any changes the new owners may impose upon Aircastle, such as risk appetite, leverage tolerance, dividend policy, or growth aspirations. Should the new owners seek to impose materially more aggressive objectives upon Aircastle, this could potentially adversely affect Fitch's view of Aircastle's strategic importance to Marubeni and/or Marubeni's ability to extend support to Aircastle during a period of stress, either of which could have an adverse effect on ratings assigned to Aircastle following the closing.
Aircastle is a lessor of midlife and older commercial aircraft. At Sept. 30, 2019, Aircastle owned 268 aircraft, predominantly in the Airbus A320ceo/neo and Boeing 737NG families, along with A330 family, Boeing 777, Embraer E195, and Boeing 747F aircraft, with a net book value of $7.7 billion.
If the acquisition closes without material changes in the ownership composition, strategic objectives or credit risk profiles of Marubeni or Aircastle, Fitch would expect to upgrade Aircastle, reflecting its strategic importance to Marubeni and a high likelihood for institutional support to be forthcoming from Marubeni in the event of stress.
If the acquisition closes, but with material changes in the ownership composition, strategic objectives or credit risk profiles of Marubeni or Aircastle, Fitch could potentially reduce the amount of institutional support incorporated into Aircastle's rating or rate Aircastle based on its standalone credit risk profile.
If the transaction does not close, Fitch would expect to affirm Aircastle's existing ratings, assuming no material changes in its standalone credit risk profile.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Post-closing, Fitch expects to classify Aircastle as a "Strategically Important" subsidiary of Marubeni, as defined under the agency's 'Non-Bank Financial Institutions Rating Criteria,' dated Oct. 12, 2018. Under this designation, Fitch may notch down from the institutional support provider's IDR by one or two notches, or, if it will result in a higher rating, notch up by one from the standalone alone credit risk profile of the subsidiary. Fitch does not publicly rate Marubeni. However, Fitch believes Marubeni to be of a sufficiently high credit quality to merit a rating uplift for Aircastle consistent with Fitch's criteria should the transaction close.