New York, November 07, 2018 -- Moody's Investors Service upgraded the corporate family rating of Avolon Holdings Limited (Avolon) to Ba1 from Ba2 and the senior unsecured ratings of its subsidiaries Avolon Holdings Funding Limited and Park Aerospace Holdings Limited to Ba2 from Ba3. The outlook was revised to stable from ratings under review. This follows the November 5 announcement that Avolon's parent Bohai Capital Holding Co., Ltd. (Bohai) has sold a 30% interest in Avolon to ORIX Corporation (A3 stable) for $2.2 billion (based on net asset value at March 2018). This rating action concludes the review for upgrade that was initiated on August 8, 2018.
Upgrades:
..Issuer: Avolon Holdings Funding Limited
.... Senior Unsecured Regular Bond/Debenture, Upgraded to Ba2 from Ba3
..Issuer: Avolon Holdings Limited
.... Corporate Family Rating, Upgraded to Ba1 from Ba2, Stable From Rating Under Review
..Issuer: Avolon TLB Borrower 1 (US) LLC
.... Senior Secured Bank Credit Facility, Upgraded to Baa3 from Ba1
..Issuer: Park Aerospace Holdings Limited
.... Senior Unsecured Regular Bond/Debentures, Upgraded to Ba2 from Ba3
Outlook Actions:
..Issuer: Avolon Holdings Funding Limited
....Outlook, Changed To Stable From Rating Under Review
..Issuer: Avolon Holdings Limited
....Outlook, Changed To Stable From Rating Under Review
..Issuer: Avolon TLB Borrower 1 (US) LLC
....Outlook, Changed To Stable From Rating Under Review
..Issuer: Park Aerospace Holdings Limited
....Outlook, Changed To Stable From Rating Under Review
RATINGS RATIONALE
Moody's upgraded Avolon's ratings based on the strengthening of the company's shareholder profile and reduction of governance risks that results from ORIX's significant investment and associated revision of Avolon's governance structure. Moody's expects that ORIX will have a positive influence on Avolon's strategy and operational and financial controls through its appointed board directors and will enhance Avolon's business and funding opportunities.
Moody's also anticipates that Bohai will use sale proceeds to reduce debt, improving its financial condition and further reducing risks to Avolon's financial stability. Bohai will likely repay debt issued by intermediate holding companies that funded an equity injection into Avolon, resulting in Avolon double leverage. Bohai has also pursued other actions to improve its funding structure and reduce leverage.
ORIX's representation on Avolon's revised board of directors provides an effective counterbalance to the influence of Bohai and its controlling shareholder HNA Group over matters of concern to Avolon's creditors. The board includes two ORIX appointed directors, three directors named by Bohai, Avolon's chief executive Domhnal Slattery and an independent director. Certain voting matters require unanimous consent of shareholder directors, including budget and business plan (including dividends), financial transactions and expenditures above certain limits, and related party transactions above $25 million. Importantly, Moody's believes that ORIX is strongly committed to Avolon achieving an investment grade financial profile.
Avolon's franchise strength as the third largest company in the commercial aircraft leasing sector will be further strengthened by ORIX's ownership interest, based on ORIX's established strength in aircraft leasing, management and trading through operating subsidiary ORIX Aviation Systems. ORIX oversees a portfolio of $10 billion of leases on 200 aircraft, approximately 75% of which are managed on behalf of others. ORIX maintains customer relationships with airlines that have above average credit quality, reflecting its investors' low credit risk orientation. Benefits to Avolon will likely include new leasing opportunities and enhanced access to capital, particularly in the Japanese financial markets.
Avolon has improved funding diversification by issuing unsecured debt, including a $1 billion five-year issuance in September 2018. However, the company's ratio of secured debt to tangible assets, which measured 46% at September 30, 2018 (including Moody's adjustments), is above the measures of higher rated peers and Moody's 30% threshold for compatibility with investment grade ratings. Moody's expects that Avolon will continue to seek opportunities to increase its mix of unsecured debt and reduce encumbered asset levels.
Avolon's ratings are also supported by its strong profitability, ample liquidity buffer and moderate leverage. Rating constraints include the firm's high mix of secured debt funding and confidence sensitivity relating to the evolving financial condition of ultimate controlling shareholder HNA Group.
Moody's could consider further ratings improvements if Avolon 1) reduces its ratio of secured debt to gross tangible assets to less than 30%, while also maintaining a strong liquidity buffer, 2) maintains profitability measures comparable to strong peers, 3) maintains a ratio of debt to tangible net worth of not more than 3x, 4) effectively manages the financing and lease risks of its committed aircraft orders, and 5) governance risks stabilize.
Moody's could downgrade Avolon's ratings if 1) the company's ratio of debt to tangible net worth increases to more than 3x, 2) liquidity runway weakens materially, 3) profitability measures weaken materially below strong peers, and 4) parent related risks increase as a result of a deterioration in credit profile.
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.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
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