DBRS Morningstar Downgrades Voyager Aviation’s Long-Term Issuer Rating to BB (low), Negative Trend

DBRS, Inc. (DBRS Morningstar) has downgraded the Long-Term Issuer Rating of Voyager Aviation Holdings, LLC (Voyager or the Company) to BB (low) from BB, while also downgrading the Company’s Long-Term Senior Debt rating to B (high) from BB (low). Concurrently, DBRS Morningstar also downgraded the Long-Term Issuer Rating of the Company’s wholly owned subsidiary, Voyager Finance Co. (VFC), to BB (low) from BB and its Long-Term Senior Debt rating to B (high) from BB (low). The trend on all ratings is Negative. DBRS Morningstar has removed the ratings from Under Review with Negative Implications where they were placed on March 31, 2020. 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 Intrinsic Assessment (IA) for the Company is BB (low), while its Support Assessment is SA3. The Support Assessment for VFC is SA1.

KEY RATING CONSIDERATIONS
The rating actions consider DBRS Morningstar’s expectation that the global economic downturn brought on by the Coronavirus Disease (COVID-19) and the dramatic adverse effect on the global aviation industry will pressure Voyager’s ability to rebuild its earnings generation ability in 2020. Voyager’s customer base is primarily comprised of large, national flag carriers, which is considered a credit positive in the current environment. To date, Voyager’s customers have remained current on their lease payments. However, given customer concentrations in the modestly sized aircraft portfolio, should a material portion of the customer base request rent deferrals, cash flows could be meaningfully impacted and credit costs rise should airline customers not resume paying. Although we see Voyager as having the necessary asset management capabilities to manage lease transitions, we expect that the transitioning of repossessed aircraft will be more lengthy and costly than in the pre-coronavirus market. Moreover, we expect that higher impairments on the value of current technology aircraft, especially widebody aircraft, have increased, creating a further potential headwind to earnings. The ratings also consider Voyager’s improved leverage as the Company utilized proceeds from its fleet positioning to deleverage the balance sheet, as well as its predominately secured funding profile which is aligned with the remaining lease term of the aircraft portfolio.

The Negative trend considers DBRS Morningstar’s expectation that the recovery in global passenger volumes will be gradual and lengthy, likely leading to a sustained period of airline bankruptcies and subdued demand for aircraft, which will create meaningful headwinds for aircraft lessors, including Voyager.

RATING DRIVERS
The Negative trend on the ratings is likely to remain in place during the duration of the coronavirus disease related downturn. Voyager’s ratings would be downgraded should the challenging operating environment created by the coronavirus pandemic lead to a reduction in demand for air travel resulting in notable rent deferrals, customer defaults or early lease terminations that pressure revenue and cash flow generation. A sustained increase in leverage would also result in a ratings downgrade.

The trend on the ratings would return to Stable should Voyager generate solid operating performance while airline passenger travel volumes start tracking towards pre-pandemic levels reducing the likelihood of rent deferrals or early lease terminations.

RATING RATIONALE
DBRS Morningstar 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 Morningstar’s view, Voyager benefits from the broader aircraft transaction sourcing capabilities through the Amedeo platform and potentially better disposition results. The management team is comprised of well-seasoned industry participants and has been stable over the last number of years. Importantly, DBRS Morningstar sees Amedeo as having solid 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 $7.0 billion of assets under management.

Beginning in 2018, Voyager undertook a strategic initiative to reposition its aircraft portfolio to reduce concentrations to certain customers, regions and aircraft type. While executing on this initiative, the Company did not alter its core focus on holding a portfolio of mostly young, technologically advanced, in-demand widebody aircraft with well-developed operator bases. Following the disposition of 12 aircraft during this period, the repositioning initiative is complete, and the Company expects to begin deploying the harvested capital into new aircraft acquisitions sourced through the strategic partnership with Amedeo. Given the impact of the repositioning on the recent financial performance of Voyager, DBRS Morningstar 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 being captured.

While the repositioning has been a positive for Voyager’s risk profile, the Company’s earnings have been adversely impacted. While DBRS Morningstar has considered this to be temporary and expected earnings generation to be restored to a positive trajectory as Voyager deployed capital to purchase additional aircraft, the severe downtown in the global aviation industry brought on by the coronavirus disease is creating a substantial headwind that will likely delay the restoration of earnings. For 2019, the Company’s net loss of $67.0 million compared to net income of $1.4 million in 2018, reflects lower rental revenue due to the smaller aircraft portfolio, losses on the sale of aircraft and losses on derivatives. Subsequently the Company reported a $13.4 million loss in 1Q20 driven by losses on derivatives.

Voyager’s aircraft portfolio is modest in size and comprised of young widebody aircraft with long attached leases (no lease expirations until 2022) to flag or sovereign-backed carriers, which in the current challenging environment is a positive for the risk profile. Importantly, Voyager has no orders for new aircraft with either of the original equipment manufacturers. The absence of a new aircraft order book, as well as minimal aircraft placement risk over the near term also are considered favorable for Voyager’s risk profile. However, the portfolio remains concentrated by customer, geography and aircraft type than many of its industry peers, which exposes Voyager to potential losses should an airline customer default or rent deferrals be requested from a material portion of the customer base. To date, the rental deferrals granted by Voyager are expected to be neutral to the Company’s expected earnings and cash flows for 2020. Moreover, DBRS Morningstar notes that any potential losses on the rent deferrals are partially mitigated by security deposits in the form of cash or letters of credit, as well as maintenance reserves held by Voyager.

Voyager’s balance sheet fundamentals continue to be acceptable with funding reasonably diversified and capitalization appropriately managed. During 1Q20, the Company refinanced its only secured term loan maturing in 2020, with no senior corporate debt maturities until mid-2021 when $415 million of senior debt matures. However, the reliance on secured forms of funding, which limits financial flexibility, is a constraint on the ratings. At March 31, 2020, outstanding debt totaled $1.5 billion, of which 72% was comprised of secured financing, which per DBRS Morningstar methodology is consistent with the current rating. At March 31, 2020, the Company’s tangible common equity (TCE) ratio was 19.7%. Over the last five years the Company’s average TCE ratio was 18.6%, which is considered “Moderate” per DBRS Morningstar’s rating methodology and supportive of the rating.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (September 24, 2019): https://www.dbrsmorningstar.com/research/350802/global-methodology-for-rating-non-bank-financial-institutions.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar 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 Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

The last rating action on this issuer took place on March 31, 2020, when the ratings were placed Under Review with Negative Implications.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For further information on DBRS Morningstar 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
Rating Committee Chair: Michael Driscoll, Managing Director - Head of NA FIG
Initial Rating Date: April 9, 2018

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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