DBRS: Intrepid Aviation’s Partnership with Amedeo Benefits Franchise; No Ratings Impact

DBRS, Inc. (DBRS) commented that the BB Long-Term Issuer Rating of Intrepid Aviation Group Holdings, LLC (Intrepid or the Company) is unaffected by the announcement that the Company’s shareholders, Centerbridge Partners, L.P. (Centerbridge) and Reservoir Capital, L.L.C. (Reservoir), have entered into a partnership with Amedeo Capital Management (Amedeo), an aircraft asset manager that focuses on widebody commercial aircraft.

DBRS sees no impact to the ratings from the announcement given that DBRS expects no material change to Intrepid’s standalone risk profile. Over the medium-term, DBRS expects the partnership to be a positive for Intrepid’s franchise as it will benefit from the increased scale of the combined platforms, including fortifying the Company’s competitive position in the widebody aircraft market, providing the potential to broaden and deepen its airline customer relationships, as well as improve its negotiating position with the OEMs.

Under the new partnership, Amedeo will take a minority stake in Intrepid, becoming a shareholder alongside Centerbridge and Reservoir. Amedeo will also acquire Intrepid’s U.S.-based management subsidiary. Additionally, Intrepid’s current CEO, Doug Winter and Chief Financial Officer, Mike Lungariello, will become Vice Chairman and Chief Financial Officer of Amedeo, respectively. By partnering with Amedeo, which now has more than $8.0 billion of widebody aircraft under management with the addition of Intrepid, DBRS sees Intrepid’s scale as increasing with the combination of the two platforms, as well as the potential for synergies to drive operating efficiency.

DBRS notes that the assets managed by Amedeo will remain separate from Intrepid’s aircraft portfolio, which totaled 30 aircraft with a value of more than $3.0 billion at March 31, 2018. As such, Intrepid will not have exposure to the A380 aircraft managed by Amedeo, an aircraft type with a very limited operator base and one that DBRS views unfavorably. Intrepid’s earnings generation ability is expected to remain solid with the only impact from the partnership being cost synergies captured from the combination of the two platforms, partially offset by the management fees that will be paid to Amedeo.

The ratings of Intrepid continue to 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.

DBRS sees Intrepid as well-positioned to navigate a potential shift in the aviation industry to an operating environment that is less favorable to emerging market airlines due to rising fuel prices, increasing interest rates, and strengthening of the U.S. dollar. That said, demand for aircraft remains solid supported by growing passenger volumes and the propensity of airlines to lease aircraft. DBRS expects 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.

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.

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