DBRS Initiates Coverage of Intrepid Aviation Group Holdings, LLC at BB; Trend Stable

DBRS, Inc. (DBRS) assigned ratings to Intrepid Aviation Group Holdings, LLC (Intrepid or the Company), including a Long-Term Issuer Rating of BB and a Long-Term Senior Debt rating of BB (low). At the same time, DBRS assigned ratings to the Company’s wholly owned subsidiary, Intrepid Finance Co. (IFC), including a Long-Term Issuer Rating of BB and a Long-Term Senior Debt rating of BB (low). The one-notch differential between the Long-Term Issuer Ratings and the Long-Term Senior Debt ratings reflect the substantial encumbrance of the Company’s aircraft portfolio as collateral for secured funding. The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Company is BB, while its Support Assessment is SA3. The Support Assessment for IFC is SA1.

KEY RATING CONSIDERATIONS
The ratings reflect the Company’s acceptable franchise strength, which is anchored by the Company’s expertise in its chosen niche market of leasing mostly young, in-demand widebody aircraft on long-term leases to airlines that are predominately flag carriers. Additionally, Intrepid has a solid management team, improving earnings and a well-designed risk management framework that has resulted in solid credit performance to date. The ratings also consider the Company’s reliance on secured forms of wholesale funding that result in a high level of asset encumbrance, above-peer balance sheet leverage, as well as a focus on aircraft that tend to be less liquid. Also, limiting the ratings are those constraints that apply broadly to the aircraft leasing industry, including a monoline business with reliance on customers that operate in a cyclical industry, and exposure to residual value risk.

The Stable trend reflects DBRS’s view that industry fundamentals remain favorable and provide a tail wind for most lessors. Specifically, increased demand for aircraft is being supported by growing passenger volumes and the propensity of airlines to lease aircraft. The Stable trend also factors DBRS’s expectations that Intrepid’s operating performance will continue to improve with all aircraft now delivered and that the Company will maintain access to capital and liquidity at reasonable costs.

RATING DRIVERS
Further development of the franchise that includes growth in the aircraft portfolio, as well as the customer base, while maintaining sound credit and asset performance could result in positive pressure. Sustained positive operating leverage and diversification of funding, including lower asset encumbrance would also be viewed positively.

A sustained deterioration in earnings, especially from weakening revenues due to compression on lease pricing or a reduction in the aircraft portfolio, could result in potential ratings pressure. Outsized impairments on the aircraft portfolio or a notable increase in leverage could also have negative implications for ratings.

RATING RATIONALE
Intrepid’s well-defined business model is to operate a portfolio of mostly young, technologically advanced in-demand widebody aircraft on long-term leases, which provide stable and long-dated revenues. While Intrepid is smaller than many other global lessors, DBRS notes that Intrepid is one of the few lessors that focuses mostly on widebody aircraft. Indeed, Intrepid’s fleet (by units) is 96% comprised of widebody aircraft compared to 14% at the other nine aircraft lessors followed by DBRS. DBRS sees Intrepid as having sound technical and asset management capabilities in wide-body aircraft across both Airbus and Boeing models.

From DBRS’s perspective, Intrepid’s earnings power is developing, but expected to strengthen as the transition of the aircraft portfolio has been completed. For 2017, the Company’s net income increased more than 30% year-on-year (YoY) to $38.7 million from $29.7 million in 2016, on strong revenue growth of 25.3%. Results benefited from an increase in aircraft utilization rates, as well as the full year benefit of rental income from two Boeing 777-300ER aircraft acquired in 4Q16, as well as the partial year benefit of three new aircraft acquired during 2017. The improved results benefitted from positive operating leverage with revenue growth significantly outpacing operating expenses growth (up 5.7% YoY), excluding depreciation and settlement income. With all aircraft on lease at the end of 2017, DBRS expects Intrepid’s earnings generation to strengthen as 2018 progresses.

Revenues in 2017 were predominately from rental income (99.1%) with a very modest amount from gains on sale of aircraft (0.9%). The long-dated nature of the Company’s leases on the aircraft affords the Company with consistent and predictable revenue generation and good visibility into near-to-medium term earnings. At year-end 2017, total contracted revenue stood at $2.3 billion, which was approximately 89% of total debt providing a sound base for debt repayment assuming no lessee credit events.

Intrepid’s risk profile is acceptable, underpinned by a solid risk management system and technical capabilities. Although modest in size, the Company’s fleet of young, in-demand aircraft that have long-term attached leases is a positive for the risk profile. Intrepid’s risk profile also benefits from the absence of a new aircraft order book, as well as minimal aircraft placement risk over the near term with only one lease maturity prior to 2022. However, given the smaller fleet size and niche focus on widebody aircraft, the Company’s portfolio is more concentrated by customer, geography and aircraft type than many of its peers.

Intrepid’s funding profile is reasonably diversified with modest maturities over the next couple of years. However, the reliance on secured forms of funding is a constraint on the ratings. Ahead of acquiring a new aircraft, Intrepid obtains funding from its deep bank lending group of 34 lenders that is generally secured by the aircraft with a duration that matches the length of the attached lease. To date, Intrepid has accessed funding through the commercial bank market, export-credit agency sponsored financing and the unsecured debt markets. At December 31, 2017, outstanding debt totaled $2.6 billion, of which 80% was comprised of secured financing, which per DBRS methodology is consistent with the current rating.

DBRS views Intrepid’s capitalization as passable given that the aircraft portfolio is comprised of young aircraft with strong contracted lease revenue. At December 31, 2017, the Company’s TCE ratio was 18.0%, which is in the “Moderate” range for leasing companies under DBRS’s methodology.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Global Methodology for Rating Finance Companies (November 2017), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: David Laterza, Senior Vice President, Head of U.S. Non-Bank FIG, Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of North American FIG, Global FIG
Initial Rating Date: April 6, 2018
Last Rating Date: Not applicable as no last rating date.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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