TEXT - S&P comments on Fly Leasing
Dec 3 - Standard & Poor's Ratings Services said today that its ratings and outlook on Bermuda-based aircraft lessor Fly Leasing Ltd. (BB/Stable/--) are unaffected by the company's announcement that Canadian-based Onex Corp. (not rated) has agreed to acquire a 50% stake in BBAM Ltd. (not rated), which manages Fly's portfolio and of which Fly owns 15%. Onex will also acquire $25 million of Fly's stock. In our opinion, the transaction will not likely result in any changes to Fly's financial policy and will not materially change its business risk profile, which we view as "fair," or its financial risk profile, which we view as "significant."
The rating on Fly reflects inherent risks of cyclical demand and lease rates for aircraft, a substantial percentage of encumbered assets, high debt leverage, and the company's complicated ownership structure. The rating also reflects Fly's position as a midtier provider of aircraft operating leases, and our expectation that the company's credit metrics will improve as its earnings and cash flow benefit from the October 2011 acquisition of 49 aircraft. Fly assumed approximately $1.2 billion of secured debt in connection with that transaction. The outlook is stable. We expect Fly Leasing's credit metrics to improve from low levels in 2011, when the company added approximately $1.2 billion of debt, primarily to fund the acquisition of a portfolio of aircraft. As Fly generates a full year's worth of earnings and cash flow from the acquired aircraft, and with some expected debt reduction, we expect funds from operations (FFO) to debt to increase to about 8% in 2012, from 5% in 2011, and to increase modestly from that level in 2013. We could raise the ratings if aircraft lease rates improved significantly from current levels because of stronger demand, resulting in FFO to debt increasing to at least 10% for a sustained period. We could lower the ratings if lease rates deteriorate, causing FFO to debt to return to about 5% or lower for a sustained period.