"We're pushing hard to get our friends at S&P to be where we think we should have been long ago," Aircastle chief executive Michael Inglese told investors on 13 February during an earnings call. "It's front and centre, and what we're focused on."
It seems that S&P Global Ratings was receptive to Inglese's message, and on 18 May Aircastle joined its listed peers AerCap and Air Lease as investment grade.
"The upgrades were long coming," says one analyst.
After S&P revealed its upgrade of the company from "BB+" to "BBB-" on 18 May, Fitch Ratings gave the Stamford, Connecticut-based lessor the same designation on 29 May.
The importance of this cannot be overstated. Not only will Aircastle benefit from a lower cost of capital, but the lessor will also be able to tap into a significantly larger investor pool.
Last year, S&P revised its outlook on Aircastle to positive and affirmed its "BB+" rating, one notch short of investment grade. But Aircastle has "continued to increase the size and improve the quality of its leased aircraft portfolio over the past two years", says the agency in its 18 May upgrade report.
It wasn't an easy undertaking to get the company to where it is. Aircastle has spent the better part of this decade cleaning up its portfolio, both reducing its freighter exposure and trimming the average age of its fleet.
Since the end of 2011, Aircastle has reduced its freighter exposure from 31% to 5% of its overall portfolio, while the company has increased its narrowbody investments from 36% to 66% of book value since the start of 2015.
The credit upgrades are further justified by Aircastle's relatively low leverage at 2.2x as of 31 March. Listed competitors AerCap and Air Lease have debt-to-equity ratios of 2.8:1 and 2.34:1, respectively. Fitch adds that the high number of unencumbered assets is another advantage for the lessor.
As a result of the upgrades, Aircastle will be able to raise debt cheaper than those going to the high-yield market. And while rates are going up, several bankers note that spreads are still tight, meaning that Aircastle will have a cost advantage compared with its competitors, particularly in the mid-life market.
One analyst tells FlightGlobal that the spread differential between AerCap and Aircastle – both "BBB-" – will narrow on the heels of the rating changes, though AerCap will still have a 10-20 basis point advantage over Aircastle.
Most importantly, with the ratings agencies bestowing the coveted investment-grade mantle on Aircastle, the lessor will have continued access to liquidity in a downturn, when the market often shuts for sub-investment-grade credits. Wile the window to raise funding narrows for all during a market shock, investment-grade status effectively de-risks the entire enterprise throughout the cycle by facilitating capital-markets access during a downturn.
Source: Cirium Dashboard
