DBRS Confirms Voyager Aviation Holdings, LLC at BB, Trend Stable

DBRS, Inc. (DBRS) confirmed the ratings of Voyager Aviation Holdings, LLC (Voyager or the Company), including its Long-Term Issuer Rating of BB and Long-Term Senior Debt rating of BB (low). Concurrently, DBRS confirmed the ratings of the Company’s wholly owned subsidiary, Voyager Finance Co. (VFC), including its Long-Term Issuer Rating of BB and 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 reflects the substantial encumbrance of the Company’s aircraft portfolio as collateral for secured funding. The trend on all ratings is Stable. The Intrinsic Assessment (IA) for the Company is BB, while its Support Assessment is SA3. The Support Assessment for VFC is SA1.

KEY RATING CONSIDERATIONS
The ratings reflect Voyager’s modest franchise strength, which is supported 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. Importantly, the ratings consider the strategic partnership agreement signed with Amedeo in 2018. Amedeo is the external manager for Voyager, providing management services and aircraft support services. Most importantly, Voyager gains access to Amedeo’s broad customer base and sound capabilities in sourcing attractive widebody aircraft acquisition opportunities. Voyager’s historically solid asset and credit performance and improving balance sheet leverage are factored into the ratings. The ratings also consider the Company’s reliance on secured forms of wholesale funding that result in a high level of asset encumbrance, as well as a focus on widebody aircraft that have a more limited operator base than narrowbody aircraft. Ratings are also constrained by the recent below-peer earnings performance which has been impacted by the Company’s strategic decision to reposition its aircraft portfolio to reduce concentrations to certain customers and aircraft types. DBRS sees the reduced revenue generation and limited profitability as temporary and expects earnings to be restored to a positive growth trajectory in the near future. 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 takes into account DBRS’s view that global aviation industry fundamentals continue to be generally favorable, despite passenger volume growth through April 2019 being outstripped by capacity growth, as well as an uptick in small airline bankruptcies. The Stable trend also factors DBRS’s expectations that Voyager’s operating performance will improve as the Company deploys capital harvested from the repositioning of the fleet through aircraft acquisitions sourced through its strategic partnership with Amedeo.

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

Conversely, an inability to capitalize on the Amedeo partnership resulting in earnings not being restored to a positive trajectory could result in negative ratings pressure. Material and recurring impairments on the aircraft portfolio or losses associated with customer defaults could also have negative implications for the ratings. A sustained increase in leverage or the inability to secure financing to capitalize on opportunities to acquire aircraft could have negative ratings implications.

RATING RATIONALE
Over the last 12 months, Voyager has undergone a repositioning of its aircraft portfolio to reduce concentrations to certain customers, regions and aircraft type, but has not altered its core focus on holding a portfolio of mostly young, technologically advanced, in-demand widebody aircraft with well-developed operator bases. During this period, Voyager has disposed of eight aircraft and will sell an additional two aircraft subsequent to 1Q19. Once the disposition portion of the repositioning initiative is complete, the Company expects to begin deploying the harvested capital into new aircraft acquisitions sourced through the strategic partnership with Amedeo in 2H19. Given the impact of the repositioning on the recent financial performance of Voyager, DBRS sees growth in the aircraft portfolio that anchors an improving trajectory in earnings as important evidence that the expected benefits of the Amedeo partnership are beginning to be realized.

DBRS considers the strategic partnership agreement entered into in 2018 between Voyager and Amedeo as fortifying and enhancing Voyager’s franchise. Under the agreement, Amedeo provides management, aircraft support and asset selection for Voyager in return for a management fee. In DBRS’s view, Voyager will benefit from the broader aircraft transaction sourcing capabilities through the Amedeo platform, potentially better disposition results, and better access to capital at a lower cost. Importantly, DBRS sees Amedeo as having sound technical and asset management capabilities in widebody aircraft across both Airbus and Boeing models. Established in 2013, Amedeo is a global leader in investing and managing widebody aircraft with approximately $7.5 billion of assets under management.

Voyager’s risk profile continues to be acceptable. Although modest in size, the Company’s portfolio of young, in-demand aircraft with long attached leases to flag or sovereign-backed carriers is a positive for the risk profile. While the portfolio continues to be more concentrated by customer, geography and aircraft type than many of its industry peers, DBRS considers the recent portfolio repositioning as beneficial to the overall risk profile, as certain concentrations were addressed. Indeed, Voyager has improved its portfolio with 84% of the portfolio in the most liquid widebody models by net book value as of March 31, 2019. The absence of a new aircraft order book, as well as minimal aircraft placement risk over the near term with no lease maturities prior to 2022 also are considered favorable for Voyager’s risk profile.

While the repositioning has been positive for Voyager’s risk profile, the Company’s earnings have been adversely impacted. DBRS considers this to be temporary and expects earnings generation to be restored to a positive trajectory as 2019 progresses and as Voyager deploys capital to purchase additional aircraft. For 2018, the Company’s net income declined to $1.3 million from $38.7 million in 2017. Revenues were slightly higher at $329.5 million, despite the decline in aircraft in the portfolio reflecting mix and related lease rates. Results were negatively impacted by a $48.9 million impairment on seven aircraft upon being designated as held for sale. DBRS notes this impairment charge was the first for Voyager since 2014. Positively, Voyager’s operating expenses declined 28% year-over-year (YoY) in 2018, benefitting from the partnership with Amedeo.

The long-dated nature of Voyager’s leases on the aircraft affords the Company with consistent and predictable revenue generation. At March 31, 2019, total contracted revenue stood at $1.34 billion, which was approximately 73% of total debt, providing a satisfactory base for debt repayment assuming no lessee credit events.

Voyager’s balance sheet fundamentals continue to be solid with funding reasonably diversified and capitalization strengthened with capital harvested from the portfolio repositioning. Debt maturities are modest with the maturity of the senior notes extended to 2021. However, the reliance on secured forms of funding, which limits financial flexibility, is a constraint on the ratings. At March 31, 2019, outstanding debt totaled $1.85 billion, of which 76% was comprised of secured financing, which per DBRS methodology is consistent with the current rating.

Overall, capital levels are satisfactory given the young, in-demand aircraft on the balance sheet that are expected to remain under lease for a sustained period. The Company’s tangible common equity (TCE) ratio improved over the last 12 months by 150 basis points to 20.5% at March 31, 2019, largely due to the repositioning initiative of the fleet. Over the last five years the Company’s average TCE ratio was 17.8%, which is considered “Moderate” per DBRS’s rating methodology and supportive of the rating.

DBRS has also changed the name of the Company’s debt issuing subsidiary to Voyager Finance Co. from Intrepid Finance Co., reflecting the legal name change following the rebranding of the parent.

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

The applicable methodology is Global Methodology for Rating Non-Bank Financial Institutions (November 2018), which can be found on our website under Methodologies & Criteria.

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

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

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This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

This is the first rating action since the Initial Rating Date.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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: 09 April 2018

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